<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 1, 1996
REGISTRATION NO. 333-3051
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
NaPro BioTherapeutics, Inc.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 2833 84-1187753
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification No.)
Incorporation or Classification Code
Organization) Number)
6304 SPINE ROAD, UNIT A
BOULDER, COLORADO 80301
TELEPHONE: (303) 530-3891
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
GORDON H. LINK, JR.
CHIEF FINANCIAL OFFICER
6304 SPINE ROAD, UNIT A
BOULDER, COLORADO 80301
TELEPHONE: (303) 530-3891
TELECOPIER: (303) 530-1296
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
----------------
Copies to:
LANCE BALK, ESQ. CHARLES W. MULANEY, JR., ESQ.
KIRKLAND & ELLIS SKADDEN, ARPS, SLATE, MEAGHER & FLOM
CITICORP CENTER 333 WEST WACKER DRIVE
153 EAST 53RD STREET CHICAGO, ILLINOIS 60606
NEW YORK, NY 10022 TELEPHONE: (312) 407-0700
TELEPHONE: (212) 446-4950 TELECOPIER: (312) 407-0411
TELECOPIER: (212) 446-4900
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE>
NAPRO BIOTHERAPEUTICS, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(b) OF REGULATION S-K
FORM S-1 ITEM LOCATION OR
NUMBER AND CAPTION CAPTION IN PROSPECTUS
<TABLE>
<S> <C> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus.... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus............................. Inside Front Cover Pages;
Outside Back Cover Page
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges........ Prospectus Summary; Risk Factors
4. Use of Proceeds........................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price........... Outside Front Cover Page; Underwriting
6. Dilution.................................. Risk Factors; Dilution
7. Selling Security Holders.................. Outside Front Cover Page; Principal
Stockholders; Underwriting
8. Plan of Distribution...................... Outside Front Cover Page; Underwriting
9. Description of Securities to be
Registered................................ Outside Front Cover Page; Prospectus
Summary; Description of Capital Stock
10. Interests of Named Experts and Counsel.... Legal Matters
11. Information with Respect to Registrant.... Outside Front Cover Page; Prospectus
Summary; Risk Factors; Price Range of
Common Stock; Dividend Policy;
Capitalization; Dilution; Selected
Financial
Data; Management's Discussion and
Analysis of Financial Condition and
Results
of Operations; Business; Management;
Principal Stockholders; Certain
Relationships and Related Transactions;
Description of Capital Stock;
Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities
Act Liabilities........................... Not Applicable
</TABLE>
<PAGE>
PROSPECTUS
[LOGO]
NaPro BioTherapeutics, Inc.
1,600,000 SHARES
COMMON STOCK
All of the 1,600,000 shares of common stock offered hereby (the "Offering")
are being sold by NaPro BioTherapeutics, Inc. (the "Company"). The Company's
common stock (the "Common Stock") is quoted on the Nasdaq Small Cap Market (the
"Nasdaq Small Cap") under the symbol "NPRO." The Common Stock has been approved
for quotation on the Nasdaq National Market under the symbol "NPRO," subject to
commencement of the Offering. On July 31, 1996, the last reported sale price of
the Common Stock on the Nasdaq Small Cap was $10.00 per share. See "Price Range
of Common Stock."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS," BEGINNING ON PAGE 6.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
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Per Share.......................... $8.75 $0.6125 $8.1375
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Total(3)........................... $14,000,000 $980,000 $13,020,000
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</TABLE>
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $450,000.
(3) The Company and certain stockholders (representing 50,000 shares of Common
Stock) have granted the Underwriters a 30-day option to purchase up to an
aggregate of 240,000 additional shares of Common Stock on the same terms
and conditions set forth above, solely to cover over-allotments, if any. If
such option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $16,100,000,
$1,127,000 and $14,566,125, respectively. See "Principal Stockholders" and
"Underwriting."
----------------
The shares of Common Stock offered by the Underwriters are subject to prior
sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that delivery of such shares will be made at the
offices of the agent of Vector Securities International, Inc., in New York, New
York, on or about August 6, 1996.
----------------
Vector Securities International, Inc. J.P. Morgan & Co.
August 1, 1996
<PAGE>
- -------------------------
The Company's paclitaxel is being sold by F.H.
Faulding & Co., Ltd. commercially in Australia
under the tradename ANZATAX(R) for the treatment
of refractory breast and ovarian cancers.
---------------------------------------------------
- -------------------------
The Company is develop-
ing yew bush plantations
in order to have access
to a more stable and re-
liable source of Taxus
biomass for use in pro-
duction of the Company's
paclitaxel.
---------------------------------------------------
The Company's paclitaxel has not been approved by the United States Food and
Drug Administration (the "FDA") for sale in the United States and, with the
exception of Australia, has not been approved for sale in any other major non-
United States market. There can be no assurance that the Company's paclitaxel
will be approved by the FDA or any other foreign regulatory agency on a timely
basis, or at all. See "Risk Factors--Government Regulation; No Assurance of
Regulatory Approval."
----------------
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements under the captions "Prospectus Summary," "Risk Factors,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" and elsewhere in this
Prospectus constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements
of the Company, or industry results, to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things, the
following: general economic and business conditions; competition;
technological advances; ability to obtain rights to technology; ability to
obtain and enforce patents; ability to commercialize and manufacture products;
ability to obtain raw materials; results of clinical studies; results of
research and development activities; business abilities and judgment of
personnel; availability of qualified personnel; changes in, or failure to
comply with, governmental regulations; ability to obtain adequate financing in
the future; and other factors referenced in this Prospectus. See "Risk
Factors."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus including information under "Risk Factors." Each
prospective investor is urged to read this Prospectus in its entirety. Unless
otherwise indicated, the information in this Prospectus assumes that the
Underwriters' over-allotment option is not exercised. Special Note: Certain
statements set forth below constitute "forward-looking statements" within the
meaning of the Reform Act. See "Special Note Regarding Forward-Looking
Statements" on page 2 for additional factors relating to such statements.
THE COMPANY
NaPro BioTherapeutics, Inc. (the "Company") is a natural product
pharmaceutical company which is focusing primarily on the development,
manufacture and commercialization of paclitaxel (referred to in some scientific
and medical literature as "taxol"(/1/)), a naturally-occurring anti-cancer
agent found in certain species of yew (Taxus) trees. The Company's paclitaxel
is referred to herein as "NBT Paclitaxel."
The market for paclitaxel is dominated by Bristol-Myers Squibb Company
("BMS"). BMS has publicly announced that worldwide sales of their formulation
of paclitaxel were approximately $580 million in 1995 and $200 million in the
first quarter of 1996. BMS's paclitaxel is the only United States Food and Drug
Administration ("FDA") approved formulation of paclitaxel, which approval is
for the treatment of refractory (non-responsive) breast and ovarian cancers.
The Company believes that by combining its proprietary extraction, isolation
and purification ("EIP(TM)") manufacturing technology and the renewable sources
of Taxus biomass being developed by the Company with its long-term, exclusive
clinical development, regulatory approval, marketing and distribution
agreements with two major international pharmaceutical companies, the Company
will be well-positioned to participate in the worldwide paclitaxel market.
There can be no assurance, however, that NBT Paclitaxel will prove safe and
effective, meet applicable standards necessary for regulatory approvals, or be
successfully marketed. See "Risk Factors--Early Stage of Product Development;
Dependence on Paclitaxel" and""Risk Factors--Dependence on Strategic
Alliances."
To advance the development and commercialization of NBT Paclitaxel, the
Company has entered into 20-year, exclusive agreements with each of F.H.
Faulding & Co., Ltd. ("Faulding") and Baker Norton Pharmaceuticals, a
subsidiary of IVAX Corporation ("IVAX" and together with Faulding, the
"Strategic Partners") for the clinical development, sales, marketing and
distribution of NBT Paclitaxel. Faulding, Australia's largest domestic
pharmaceutical company, had 1995 sales of approximately $1.3 billion, and IVAX,
a diversified international healthcare company, also had 1995 sales of
approximately $1.3 billion.
The Strategic Partners have agreed to fund and undertake the clinical trials
required in order to obtain regulatory approvals for the commercialization of
NBT Paclitaxel in their respective territories. The Company is responsible for
supplying the Strategic Partners with NBT Paclitaxel for all of their clinical
and commercial requirements. Under the terms of each agreement, IVAX and
Faulding pay a fixed price for NBT Paclitaxel for non-commercial sales. For NBT
Paclitaxel sold commercially, Faulding pays the Company a substantial share of
gross revenue. For IVAX's commercial sales, IVAX will pay the Company on a cost
plus basis for the Company's manufacture of NBT Paclitaxel and in addition will
pay the Company a substantial share of IVAX's NBT Paclitaxel profits (as
determined pursuant to the IVAX Agreement (as defined herein)).
- --------
(1) TAXOL(R) is a registered trademark of Bristol-Myers Squibb Company for an
anti-cancer pharmaceutical preparation containing paclitaxel.
3
<PAGE>
Faulding obtained regulatory approval and began marketing NBT Paclitaxel as a
generic pharmaceutical in Australia in January 1995 for the treatment of
refractory breast and ovarian cancers and is seeking approval to sell NBT
Paclitaxel in other countries in its defined territory. IVAX filed an
investigational new drug exemption ("IND") application for NBT Paclitaxel with
the FDA in June 1994. IVAX is currently engaged in Phase II/III clinical trials
with NBT Paclitaxel for treating refractory breast and ovarian cancers and
believes it may be able to submit a new drug application ("NDA") to the FDA for
at least one indication in 1997. There can be no assurance, however, as to the
completion of any clinical trials or as to whether IVAX will meet anticipated
timetables or be successful in obtaining any necessary regulatory approvals or
successfully market NBT Paclitaxel even if approval has been obtained. See
"Risk Factors--Government Regulation; No Assurance of Regulatory Approval" and
"Risk Factors--Uncertain Efficacy of Paclitaxel; Adverse Side Effects
Associated with Use of Paclitaxel."
The Company's EIP(TM) technology is designed to allow the extraction,
isolation and purification of paclitaxel and other taxanes (compounds
structurally similar to paclitaxel that can be synthesized into paclitaxel)
from renewable sources of biomass such as needles and limbstock harvested from
ornamental yew trees and bushes. In order to have access to a more stable and
reliable source of Taxus biomass for use in the production of NBT Paclitaxel,
the Company has entered into agreements with Pacific Biotechnologies, Inc.
("PBI"), a subsidiary of Pacific Regeneration Technologies, Inc., one of
Canada's largest reforestation companies (the "PBI Agreement"), and Zelenka
Nursery, Inc. ("Zelenka"), one of the largest horticulture companies in the
United States (the "Zelenka Agreement"), each to grow cloned ornamental yew
bushes on a large scale. The Company intends to supplement its supply of
biomass obtained from PBI and Zelenka by entering into additional agreements
with commercial growers of ornamental yew bushes, and, if economical, to
develop its own plantations. The Company is currently constructing a large-
scale commercial EIP(TM) manufacturing facility with planned capacity to meet
the forecasted commercial needs of the Strategic Partners through 1999. In
addition, in order to increase production yields of NBT Paclitaxel, and lower
its cost of manufacture, the Company is developing a semi-synthetic process for
manufacturing NBT Paclitaxel from certain other taxanes contained in renewable
biomass sources.
----------------
The Company was incorporated as a Washington corporation in 1991, and was
reincorporated as a Delaware corporation in 1993. The Company has three
subsidiaries, NaPro BioTherapeutics (Canada) Inc., a British Columbia company
("NaPro Canada"), NaPro BioTherapeutics (Ireland) Ltd., a company formed under
the laws of Ireland and NaPro West, Inc., a Delaware corporation. All
references herein to the "Company" include these subsidiaries, unless the
context requires otherwise.
The Company's principal executive offices are located at 6304 Spine Road,
Unit A, Boulder, Colorado 80301, and its telephone number is (303) 530-3891.
4
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered.......................... 1,600,000 shares
Common Stock to be outstanding after the Of-
fering...................................... 12,036,117 shares(1)
Use of proceeds.............................. To fund capital expenditures,
to fund development of
ornamental yew tree plantations
and for general corporate
purposes. See "Use of
Proceeds."
Nasdaq Small Cap symbol...................... NPRO
Nasdaq National Market symbol................ NPRO
</TABLE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------ -----------------
1991 1992 1993 1994 1995 1995 1996
------ ------- ------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Sales of products...... $ 112 $ 363 $ 1,248 $ 1,002 $ 2,623 $ 1,148 $ 691
Other.................. 12 202 1 5 -- -- --
------ ------- ------- ------- ------- ------- --------
Total revenues........ 124 565 1,249 1,007 2,623 1,148 691
Operating expenses:
Research, development
and cost of prod-
ucts sold............. 611 1,670 3,505 2,707 4,325 1,074 1,786
General and administra-
tive.................. 261 1,215 2,690 2,044 2,310 451 704
Other.................. -- -- 7 2,238 272 269 --
------ ------- ------- ------- ------- ------- --------
Total operating ex-
penses............... 872 2,885 6,202 6,989 6,907 1,794 2,490
------ ------- ------- ------- ------- ------- --------
Operating loss.......... (748) (2,320) (4,953) (5,982) (4,284) (646) (1,799)
Other income (expense),
net.................... 5 24 45 (152) 213 9 39
------ ------- ------- ------- ------- ------- --------
Loss before extraordi-
nary expense........... (743) (2,296) (4,908) (6,134) (4,071) (637) (1,760)
Extraordinary expense... -- -- -- (512) -- -- --
------ ------- ------- ------- ------- ------- --------
Net loss.............. $ (743) $(2,296) $(4,908) $(6,646) $(4,071) $ (637) $ (1,760)
====== ======= ======= ======= ======= ======= ========
Loss per share(2):
Before extraordinary
expense.............. $(0.22) $ (0.38) $ (0.79) $ (0.91) $ (0.51) $ (0.08) $ (0.21)
Extraordinary expense. -- -- -- (0.08) -- -- --
------ ------- ------- ------- ------- ------- --------
Net loss(2)........... $(0.22) $ (0.38) $ (0.79) $ (0.99) $ (0.51) $ (0.08) $ (0.21)
====== ======= ======= ======= ======= ======= ========
Weighted average shares
outstanding(2)......... 3,439 6,103 6,201 6,761 7,973 7,713 8,527
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996,
----------------------------------
PRO FORMA AS
ACTUAL PRO FORMA(3) ADJUSTED(4)
------- ------------ ------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term secu-
rities..................................... $ 5,590 $ 8,663 $21,233
Working capital............................. 6,731 9,804 22,374
Total assets................................ 10,206 13,279 25,849
Long-term obligations, net of current matu-
rities..................................... 1,739 1,739 1,739
Minority interest(5)........................ 3,715 3,715 3,715
Accumulated deficit......................... (20,460) (20,460) (20,460)
Stockholders' equity........................ 3,656 6,729 19,299
</TABLE>
- -------
(1) Based upon shares outstanding as of June 30, 1996. Includes 1,637,722
shares of Common Stock issued upon exercise of the Redeemable Warrants (as
defined herein) prior to the Warrant Redemption Date (as defined herein).
Does not include: (i) 144,288 shares issued but held in treasury; (ii)
125,000 shares of Common Stock issuable upon conversion of the Company's
Convertible Preferred Stock, Series A outstanding as of June 30, 1996;
(iii) 459,092 shares of Common Stock issuable upon conversion of NaPro
Canada's Convertible Preferred Stock, Series A outstanding as of June 30,
1996; (iv) 585,356 shares of Common Stock which were subject to outstanding
options as of June 30, 1996, at exercise prices ranging from $0.19 to
$11.75 per share, with a weighted average exercise price of $5.43 per
share; (v) 177,779 shares of Common Stock issuable upon exercise of
warrants outstanding as of June 30, 1996, at exercise prices ranging from
$0.07 to $1.88 per share, with a weighted average exercise price of $0.61
per share; (vi) 400,000 shares of Nonvoting Common Stock issuable upon
exercise of the Faulding Warrants (as defined herein) outstanding as of
June 30, 1996, at an exercise price of $5.00 per share; and (vii) 360,000
shares of Common Stock issuable upon exercise of the Whale Warrants (as
defined herein) outstanding as of June 30, 1996, at an exercise price of
$7.50 per share. See "Risk Factors--Shares Eligible for Future Sale;
Registration Rights," "Management--Directors' Compensation," "Management--
1993 Stock Option Plan," "Management-- Compensation of Executive Officers,"
"Description of Capital Stock--Company Preferred Stock; NaPro Canada
Preferred Stock," and "Description of Capital Stock--Redeemable Warrants."
(2) See Note 1 of the Notes to Financial Statements for information concerning
the computation of net loss per share.
(3) Gives pro forma effect to the issuance of 630,620 shares of Common Stock
and the receipt of $3,073,100 (net of offering costs of $80,000) in cash
pursuant to Cash Exercise (as defined herein) elections and to the issuance
of 1,007,102 shares of Common Stock pursuant to Cash-less Exercise (as
defined herein) elections of holders of the Redeemable Warrants prior to
the Warrant Redemption Date. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Description of Capital
Stock--Redeemable Warrants."
(4) As adjusted to give effect to the sale of 1,600,000 shares of Common Stock
offered by the Company hereby, after deducting underwriting discounts and
commissions and the estimated expenses of the Offering. See "Use of
Proceeds" and "Capitalization."
(5) Related to outstanding shares of preferred stock of NaPro Canada
exchangeable into an equivalent number of shares of Common Stock of the
Company. See Note 6 of Notes to Financial Statements.
5
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY BY POTENTIAL INVESTORS IN EVALUATING AN
INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY. SPECIAL NOTE: CERTAIN
STATEMENTS SET FORTH BELOW CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF THE REFORM ACT. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS" ON PAGE 2 FOR ADDITIONAL FACTORS RELATING TO SUCH STATEMENTS.
EARLY STAGE OF PRODUCT DEVELOPMENT; DEPENDENCE ON PACLITAXEL. The Company
has a limited relevant operating history upon which an evaluation of its
prospects can be made. Such prospects must be considered in light of the
risks, expenses and difficulties frequently encountered in establishing a
business in the evolving, heavily regulated pharmaceutical industry, which is
characterized by an increasing number of market entrants, intense competition
and a high failure rate. In addition, significant challenges are often
encountered in shifting from development to commercialization of new products.
Since its inception, the Company has devoted its efforts almost entirely to
the development and implementation of its EIP(TM) technology for producing NBT
Paclitaxel. The Company currently has no other drugs in clinical trials and
has conducted very limited investigation into additional product
possibilities. The Company cannot predict when, if ever, it will identify or
successfully develop any additional product candidates and any additional
products. The Company is exclusively dependent on the sales of NBT Paclitaxel
for revenues for the foreseeable future. The Company's production of NBT
Paclitaxel continues to be limited to small-scale production for use by the
Strategic Partners for research and development and in clinical trials and
limited commercial sales. The Company's future growth and profitability will
depend upon, among other things, the ability of the Company to complete
development of its EIP(TM) technology, develop large scale commercial
manufacturing capacity sufficient to meet requirements of the Strategic
Partners, operate without infringing on the patent or proprietary rights of
others, obtain regulatory approval for its manufacturing processes, including
using biomass sources other than the bark of the wild Pacific yew for the
production of NBT Paclitaxel, and develop and obtain regulatory approval for
its semi-synthetic formulation of paclitaxel, of which there can be no
assurance. The Company's growth and profitability is also dependent on the
success of the Strategic Partners in advancing NBT Paclitaxel through
regulatory processes in the United States and other countries around the
world, and in fostering commercial acceptance of NBT Paclitaxel in the
oncological market as a form of chemotherapy. This will require substantial
additional clinical testing and marketing efforts and the expenditure of
significant funds by the Strategic Partners. Although NBT Paclitaxel is
currently approved for commercial sale in Australia, the Company does not
expect NBT Paclitaxel to receive regulatory approvals in most other countries,
including the United States, for at least two years, if at all. Clinical
testing of the safety and efficacy of new drugs takes several years, and the
time required to commercialize new drugs cannot be predicted with accuracy.
Product development of pharmaceuticals is highly uncertain, and unanticipated
developments, clinical or regulatory delays, unexpected adverse side effects,
inadequate therapeutic efficacy or competitive and technological developments
could slow or prevent the product development efforts of the Company and the
Strategic Partners and have a material adverse effect on the Company. There
can be no assurance that NBT Paclitaxel will receive the necessary regulatory
approvals, prove safe and effective, be capable of being produced in
commercial quantities at acceptable cost or be successfully marketed by the
Strategic Partners in the oncological market. The failure of NBT Paclitaxel to
achieve any of the foregoing would have a material adverse effect on
the Company and could result in the Company being forced to discontinue
operations. See "--Government Regulation; No Assurance of Regulatory Approval"
and "Business."
DEPENDENCE ON STRATEGIC ALLIANCES. The Company has entered into long-term
agreements with the Strategic Partners pursuant to which the Strategic
Partners have assumed control of the clinical development and
commercialization of NBT Paclitaxel in their respective territories, including
conducting clinical trials and preparing and filing regulatory submissions.
The Company is responsible for the manufacture of NBT Paclitaxel as a
pharmaceutical under current good
6
<PAGE>
manufacturing practices ("cGMP") to satisfy the Strategic Partners' clinical
and commercial needs. The Company has limited independent clinical testing and
marketing capabilities and experience and it is unlikely that the Company
could achieve a sufficient independent level of such capabilities and
experience in the short or medium term. In the event that either of the
agreements with the Strategic Partners were to be terminated, there can be no
assurance that the Company would be able to enter into new, comparable
agreements, or establish its own marketing and sales force to market NBT
Paclitaxel effectively on a global basis and compete with BMS and others, any
of which would have a material adverse effect on the Company's business,
financial condition and results of operations. Sales of NBT Paclitaxel to the
Strategic Partners constituted virtually all of the Company's revenues during
the year ended December 31, 1995 and during the three months ended March 31,
1996, and the Company expects that sales to the Strategic Partners will
continue to constitute substantially all of the Company's revenues for the
foreseeable future.
There can be no assurance that the Strategic Partners will continue to
perform their obligations under these agreements, that they will be successful
in their clinical trials or in receiving the necessary regulatory approvals
for NBT Paclitaxel or that they will be successful in marketing and
distributing NBT Paclitaxel, if regulatory approvals are received. The failure
of the Strategic Partners to perform any such obligations or to be successful
in marketing NBT Paclitaxel would have a material adverse effect on
the Company. Furthermore, there can be no assurance that business conflicts
will not arise between the Strategic Partners or between the Company and the
Strategic Partners over paclitaxel or non-paclitaxel anti-cancer drugs that
may be produced by the Strategic Partners. In addition, the agreements with
the Strategic Partners are subject to termination under various circumstances.
Faulding may terminate its agreement with the Company upon the occurrence of
certain events, including the following: (i) if Faulding becomes controlled by
a pharmaceutical company that sells paclitaxel in the Faulding territory; (ii)
if the Company becomes controlled by IVAX or BMS; (iii) if the Company is
purchased by a pharmaceutical company which sells paclitaxel in the Faulding
territory and that company refuses to be bound by the terms of the Faulding
agreement; or (iv) if the Company is unable to meet the paclitaxel supply
requirements of Faulding as defined under the agreement. IVAX may terminate
its agreement if the Company materially breaches the agreement. Pursuant to
the agreement, a material breach includes the Company's failure to meet the
supply requirements of IVAX for a continuing three year period. In addition,
if the Company is unable to meet at least 75% of its supply obligations to
IVAX for a continuing period of 90 days, IVAX may have the right to obtain
certain confidential manufacturing information and to have paclitaxel
manufactured by a third party. Termination of the agreements under certain of
the circumstances set forth above could prevent the Company from selling NBT
Paclitaxel in the Faulding and IVAX territories for two years and three years
following termination, respectively. If either of the Strategic Partners
terminates or breaches its agreement, such termination or breach would have a
material adverse effect on the Company and could result in the Company being
forced to discontinue operations. See "Business--Strategic Alliances."
LIMITED PRODUCT SALES; HISTORY OF SIGNIFICANT OPERATING LOSSES; ANTICIPATED
FUTURE LOSSES. Since its inception, substantially all of the Company's
revenues have come from sales of NBT Paclitaxel to the Strategic Partners for
clinical trials and with respect to Faulding in Australia, limited commercial
sales. The Company has generated only limited revenues and has incurred
significant operating losses, including operating losses of approximately $5.0
million, $6.0 million and $4.3 million for the years ended December 31, 1993,
1994 and 1995, and $1.8 million for the three months ended March 31, 1996,
resulting in an accumulated deficit of $20.5 million as of March 31, 1996. In
addition, losses are continuing and will continue until such time, if ever,
that the Company is able to generate sufficient revenue from sales of NBT
Paclitaxel to cover its expenses. The Company expects to incur significant
operating losses at least through 1997, if not longer, as the Company scales
up its manufacturing capabilities and develops and secures new sources of
biomass to produce NBT Paclitaxel. Furthermore, the Company's ability to
achieve profitability depends on the ability of the Strategic Partners to
obtain required regulatory approvals in the United States among other places,
and successfully market NBT
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Paclitaxel as well as to operate in a competitive environment. The Company's
profitability will also depend on its ability to establish and operate FDA-
approved manufacturing facilities that produce quantities of NBT Paclitaxel in
sufficient quantities on a timely basis to supply the Strategic Partners'
requirements and to operate without infringing on the patents and proprietary
rights of others. There can be no assurance that any of such events will
occur, that the Company's revenues will increase or that the Company will ever
achieve profitable operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and Financial
Statements.
POTENTIAL LIMITATIONS ON THE AVAILABILITY OF RAW MATERIALS. Through 1994,
the Company harvested bark of the wild Pacific yew tree as the primary raw
material used in the Company's production of NBT Paclitaxel. Harvesting the
bark from Pacific yew trees generally requires cutting down the trees. This
practice has been the subject of environmental controversy between
pharmaceutical companies, governmental agencies regulating public lands and
environmental activist groups due to the prevalence of some wild Pacific yew
trees located in old growth forests which are frequently the habitat of the
spotted owl and other endangered species. As such, there can be no assurance
that the bark of the wild Pacific yew tree will be available for the
production of NBT Paclitaxel in the future. The Company is developing its
EIP(TM) technology to extract paclitaxel and other taxanes from non-bark
sources of ornamental yew trees and bushes. The use of non-bark sources for
paclitaxel may require additional regulatory approval, of which there can be
no assurance. See "--Government Regulation; No Assurance of Regulatory
Approval."
To improve its access to raw materials for the production of NBT Paclitaxel
and to help avoid environmental issues, the Company is implementing a
plantation strategy pursuant to which it grows ornamental yew bushes which it
believes may provide it with a renewable source of biomass. The Company has
entered into the PBI Agreement and Zelenka Agreement pursuant to which PBI and
Zelenka, respectively, will grow and harvest ornamental yew bushes for the
Company. The Company also intends to supplement its supply of biomass obtained
from PBI and Zelenka by entering into additional agreements to purchase
biomass and mature yew bushes from commercial growers and, if economical, to
develop its own plantations. There can be no assurance that the Company will
be able to enter into additional agreements on acceptable terms or at all or
that the Company will be successful in developing its own plantations. In
addition, there can be no assurance that the arrangements with PBI and Zelenka
will prove successful in supplying biomass in adequate quantities or of
sufficient quality to satisfy the Strategic Partners' commercial requirements,
or that alternate sources of biomass will be available to the Company, if
necessary for its operations, on commercially reasonable terms, in sufficient
quantities, or at all. The biomass used for NBT Paclitaxel may also be
difficult to obtain in the future due to many other factors, including
environmental regulation and litigation, geographic location, weather
patterns, scarcity, destruction by insects, vandalism, acts of God and fire.
Moreover, yew biomass is subject to a very long product cycle (between four
and five years) between the planting of the yew trees and bushes and
harvesting and accordingly, mature yew trees and bushes, if destroyed or
damaged cannot be replaced on a timely basis. The paclitaxel content of the
biomass obtained by the Company may also vary as a result of fluctuations in
temperature, humidity, soil content and age of the biomass source as well as
geographical area. Failure to obtain an adequate supply of quality biomass on
a timely basis would limit or preclude the Company's ability to manufacture
NBT Paclitaxel, and would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--
Biomass; Manufacturing."
LIMITED MANUFACTURING EXPERIENCE; DEPENDENCE ON A COMMERCIAL-SCALE
PACLITAXEL MANUFACTURING FACILITY; TECHNOLOGICAL CHALLENGES. Although the
Company has constructed and currently operates small-scale manufacturing
facilities in the United States and Canada, the Company has limited experience
in producing NBT Paclitaxel in large-scale commercial quantities adequate to
support sales in a major market. Since its inception, the Company has produced
NBT Paclitaxel only in quantities
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necessary for research and clinical trials and limited commercial sales by
Faulding in Australia. The Company does not currently have the trained staff
or the facilities necessary to manufacture NBT Paclitaxel in large-scale
commercial quantities. The Company is currently in the process of constructing
a large-scale commercial EIP(TM) manufacturing facility in Boulder, Colorado
with the expected capacity to produce a sufficient volume of NBT Paclitaxel to
meet the Strategic Partners' needs through 1999. In order to increase its
capacity to manufacture NBT Paclitaxel, the Company is currently developing a
semi-synthesis process. If the Company successfully develops a semi-synthetic
process and receives the required regulatory approvals, the Company intends to
either expand its current facility under construction to accommodate semi-
synthesis manufacturing or construct a separate semi-synthesis manufacturing
facility. There can be no assurance, however, that the proposed large-scale
commercial EIP(TM) manufacturing facility or semi-synthesis manufacturing
facility will be completed within the time periods indicated, if at all, or be
adequate to supply the Strategic Partner's commercial long-term needs. In
addition, there can be no assurance that the Company will receive the
necessary regulatory approvals for its manufacturing facilities or processes.
The success of the Company's manufacturing facilities will depend upon its
ability to successfully adapt its EIP(TM) technology for large-scale
commercial production of NBT Paclitaxel. The adaptation of such technologies
to accommodate increased production volumes may result in significant expense
and is subject to numerous risks, including unanticipated problems and delays.
There can be no assurance that the Company will successfully adapt its EIP(TM)
technology to large-scale commercial production on a timely basis, if at all.
There also can be no assurance that the Company will be able to achieve at any
facility the product yields and operating efficiencies necessary to produce
NBT Paclitaxel at a competitive cost. The Company's failure to adapt its
technology for large-scale commercial production and to establish and
successfully operate large-scale commercial manufacturing facilities at a
competitive cost would have a material adverse effect on the Company. In
addition, although the Company performs its own procedures for isolation and
purification of paclitaxel and other taxanes, the Company currently has a
contract with a third party for the extraction of crude paclitaxel and other
taxanes from yew biomass. This contract provides for only small-scale
extraction. Accordingly, to meet the expected increase in demand for NBT
Paclitaxel if regulatory approvals are obtained, the Company must either
contract out its large-scale extraction requirements or build an extraction
facility. There can be no assurance that a contract can be obtained on
commercially reasonable terms, if at all, or that an extraction facility can
be constructed in a timely fashion and receive the necessary regulatory
approvals. The failure of the Company to secure a large scale extraction
contract or to construct a regulatory-approved extraction facility on a timely
basis in order to meet its supply obligations to the Strategic Partners would
have a material adverse effect on the Company. See "Business--Biomass;
Manufacturing" and "Business--Government Regulation and Product Approvals."
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL. The research
and development, manufacture, preclinical and clinical testing, distribution
and marketing of pharmaceutical products, including NBT Paclitaxel, are
subject to extensive regulation by numerous governmental authorities in the
United States and other countries. The process of obtaining regulatory
approval by the FDA and other required regulatory approvals, is lengthy,
expensive and uncertain. Prior to marketing in the United States, product
candidates, including NBT Paclitaxel, must undergo extensive preclinical and
clinical testing to satisfy the FDA that it is safe and efficacious in each
clinical indication (the specific condition intended to be treated), dosage,
dose schedule and route of administration for which approval for use is
sought. In addition, approval by analogous regulatory authorities in other
countries must be obtained prior to commencing marketing of pharmaceutical
products in those countries. The approval process varies from country to
country and approval for sale in one country may facilitate, but does not
ensure approval in other countries. Delays in obtaining regulatory approvals
would adversely affect the development, testing and marketing of NBT
Paclitaxel and the ability of the Company to generate revenues from the sale
of NBT Paclitaxel. While certain of the Company's employees have some
experience in conducting and managing the preclinical and clinical testing
necessary to obtain regulatory approval, the Company is relying almost
exclusively on the Strategic
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Partners to manage the process of taking NBT Paclitaxel through the numerous
clinical tests and regulatory processes necessary to gain approval for use in
those countries that Faulding or IVAX are targeting for commercial sales of
NBT Paclitaxel. There can be no assurance that NBT Paclitaxel, or any other
product candidate developed by the Company, will prove to be safe and
effective in clinical trials or that the Strategic Partners will obtain
regulatory approvals for NBT Paclitaxel in a timely manner, or at all. Even if
regulatory clearance is obtained, NBT Paclitaxel is subject to continual
review, and later discovery of previously unknown defects or failure to comply
with the applicable regulatory requirements may result in restrictions on
marketing or withdrawal from the market as well as possible civil or criminal
sanctions.
Before receiving FDA approval to market NBT Paclitaxel, the Company and the
Strategic Partners will have to demonstrate that NBT Paclitaxel represents a
safe and effective therapy. Data obtained from preclinical and clinical
activities are susceptible to varying interpretations which could delay, limit
or prevent regulatory approvals. In addition, delays or rejections may be
encountered based upon additional government regulation from future
legislation or administrative action or changes in FDA policy during the
period of product development, preclinical and clinical trials and FDA
regulatory review. If regulatory approval of NBT Paclitaxel is granted, such
approval will be limited to those disease states and conditions for which the
product is, as demonstrated through clinical studies, safe and effective.
Furthermore, approval may entail ongoing requirements for post-marketing
studies. In order for regulatory approval to be obtained, manufacturers of
therapeutic products sold in the United States are required to satisfy the FDA
that their manufacturing facilities and processes adhere to applicable
standards, including cGMP, and to engage in extensive record keeping and
reporting. Failure to comply with cGMP regulations may result in restrictions
on NBT Paclitaxel's marketing or manufacture and may result in product
seizures, product recalls, or withdrawal of the product from the market.
Compliance with such regulations is costly and requires substantial time and
attention. Following an inspection of the Company's manufacturing facilities
in Canada and the United States by an auditor of the Australian Therapeutic
Good Administration ("TGA"), Australia's equivalent of the FDA, the TGA issued
approvals to the Company as an Australian cGMP compliant paclitaxel
manufacturer. None of the Company's manufacturing facilities, however, have
been inspected by the FDA.
The majority of clinical trials performed with NBT Paclitaxel utilize
product manufactured from the Company's inventory of bark from the wild
Pacific yew tree. The Company intends, however, to include product
manufactured from needles and limbstock harvested from ornamental yew trees
and bushes in its Drug Master File ("DMF") which the Company will file in
support of IVAX'S NDA. United States regulatory approvals by or agreements
with the FDA will be required to make these changes in biomass sources. It
will be necessary to demonstrate that paclitaxel extracted from a different
species, or a different part of the tree is chemically and biologically
equivalent to a reference material which has been previously characterized and
tested. Similarly, the same type of demonstration must be made for paclitaxel
produced using the Company's planned semi-synthesis manufacturing process. It
is anticipated that the production of paclitaxel semi-synthetically will not
be referenced in the initial NDA filing, but rather in an SNDA to be filed
after the initial approval of NBT Paclitaxel, if ever. Each of these changes
potentially introduces additional uncertainty in the FDA review process which
could delay or inhibit the marketing approval for NBT Paclitaxel. There can be
no assurance that regulatory approval will be received on a timely basis, if
at all. Failure to receive such approval would have a material adverse effect
on the Company's business, financial condition and result of operations.
The Company is subject to United States laws and regulations applicable to
exporting drugs. On April 26, 1996, the export provisions in the Food, Drug
and Cosmetic Act (the "FDC Act") were amended in Chapter 1A of Title II,
Supplemental Appropriations For The Fiscal Year Ending September 30, 1996, in
the "FDA Export Reform and Enhancement Act of 1996" to authorize the export
10
<PAGE>
of a drug before marketing approval is obtained in the United States, to any
country, if the drug (i) complies with the laws of the importing country, and
(ii) has valid marketing authorization by the appropriate authority in a
country listed by the statute, one of which is Australia. The Company has
received valid marketing authorization from Australia. Thus, if the other
statutory conditions are met, the Company believes that future exports from
the United States of NBT Paclitaxel labeled in accordance with the laws of
Australia and, for countries other than Australia, of the importing country,
should be permissible without an FDA permit or other FDA approval, although no
such assurance can be given.
The Company is also subject to, among others, the regulations of Canada,
the Province of British Columbia, the United States Environmental Protection
Agency, the Department of Interior (United States Fish and Wildlife Services
and the Bureau of Land Management), the Department of Agriculture (United
States Forest Service) and other countries and regulatory agencies. Pursuant
to the National Environmental Policy Act, certain United States agencies have
prepared an Environmental Impact Statement that addresses the impact of
harvesting wild Pacific yew trees, including cutting down wild Pacific yew
trees on federally-managed land. The Company ceased harvesting bark in August
1994, although the Company has biomass in its inventory obtained from the bark
of the wild Pacific yew tree. The Company is also subject to federal, state
and local laws and regulations governing the use and disposal of hazardous
materials as well as regulations imposed by the Occupational Safety and Health
Administration governing worker safety. There can be no assurance that the
Company is at all times in complete compliance with all such requirements. The
Company has made and will continue to make expenditures to comply with
environmental requirements. Compliance with these regulations is time-
consuming and expensive. The failure to comply with these regulations,
however, could have a material adverse effect on the Company's business,
financial condition and results of operations.
The adoption by federal, state or local governments of significant new laws
or regulations or a change in the interpretation or implementation of existing
laws or regulations relating to environmental or other regulatory matters,
including FDA requirements, could increase the cost of producing NBT
Paclitaxel, delay regulatory approval, preclude continued marketing, or
otherwise adversely affect the Company's ability to produce or sell NBT
Paclitaxel. Adverse governmental regulations which might arise from future
legislative or administrative regulations or other actions cannot be
predicted. In addition, the Company's activities have been opposed by the
Oregon Natural Resources Council ("ONRC") because of their concern over wild
Pacific yew in old growth forests. Even though the Company no longer harvests
biomass from the bark of the wild Pacific yew and does not intend to do so,
there can be no assurance that the ONRC and other environmental activist
groups will not oppose other activities of the Company, which may have the
effect of delaying or halting production of NBT Paclitaxel, each of which
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Strategic Alliances" and
"Business--Government Regulation and Product Approvals."
UNCERTAIN EFFICACY OF PACLITAXEL; ADVERSE SIDE EFFECTS ASSOCIATED WITH USE
OF PACLITAXEL. Paclitaxel is not considered to be a long-term cure for cancer.
Safety and efficacy trials completed by BMS, however, have demonstrated to the
satisfaction of the FDA that paclitaxel is efficacious in treating refractory
ovarian and breast cancers in accordance with their guidelines. The Company
understands that other clinical trials have indicated that paclitaxel,
individually and in combination with other chemotherapeutic agents, may be
effective in treating other forms of cancer. Such trials are ongoing, however,
and, accordingly, there is no conclusive evidence of paclitaxel's
effectiveness in treating other forms of cancer. It may take several years to
obtain the final results of such trials, and there can be no assurance that
paclitaxel will demonstrate efficacy as a broad-spectrum anti-cancer agent or
that it will prove to be more efficacious than other chemotherapeutic agents
as single agent therapy in treating any form of cancer. Like chemotherapy
agents in general, the present formulation
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<PAGE>
for administering paclitaxel is believed to cause adverse side effects, which,
in some patients, are extensive. These side effects include hypersensitivity
(allergic) reactions, which require the use of various premedications to
minimize the side effects. In addition, paclitaxel has been shown to produce
peripheral neuropathy (loss of sensation or pain and tingling in the
extremities) and neutropenia (low white blood cell counts) which, as a result,
may limit its use in certain cases. There can be no assurance that such side
effects or other unintended and/or toxic side effects will not adversely
affect the ability of the Strategic Partners to obtain regulatory approval for
or to market NBT Paclitaxel. See "Business--Paclitaxel Overview."
RAPID TECHNOLOGICAL CHANGE; INTENSE COMPETITION. The biopharmaceutical
industry is subject to rapid and significant technological change. The Company
competes with all entities developing and producing therapeutic agents for
cancer treatment or other diseases which may be the subject of future product
development efforts of the Company. These entities include numerous academic
and research organizations and pharmaceutical and biotechnology companies
pursuing production of, among other things, genetically engineered drugs,
drugs manufactured through chemical synthesis and cell-tissue growth, as well
as companies specifically pursuing the production of paclitaxel for commercial
sale from natural product extraction techniques. The Company's competitors may
succeed in developing technologies, products and processes that render the
Company's processes and/or products obsolete or non-competitive and which may
have a material adverse effect on the Company's business, financial condition
and results of operations. Many companies and research institutions are
seeking means to obtain paclitaxel and other taxanes from renewable biomass
components of yew trees and other sources in order to increase potential
paclitaxel yields, avoid environmental concerns and reduce the cost of
biomass. Although the Company has engineered a technology for the extraction,
isolation and purification of NBT Paclitaxel from bark and renewable parts of
yew trees and bushes, the development by others of manufacturing methods for
paclitaxel-containing biomass sources that are significantly less costly than
the Company's could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Competition."
In addition, the Company is aware of several potential competitors that
have developed and patented or are developing various processes for producing
paclitaxel and paclitaxel-related substances semi-synthetically and through
other processes and which have resulted or may result in products that are as
effective or more effective than paclitaxel extracted from the bark of yew
trees. Although the Company is currently conducting research to increase
product yield through a semi-synthesis process incorporating its proprietary
and licensed technology, no assurance can be given that technical problems
will not be encountered in developing such technology for clinical or
commercial use or that any semi-synthesis process that may be developed by the
Company will not be deemed to infringe on the proprietary rights of others or
will itself be protectable by patents. In addition, although the Company
believes the production of fully synthetic paclitaxel is not currently
commercially viable, the discovery by a third party of a cost-effective means
to fully synthesize paclitaxel in commercial quantities or the manufacture of
taxane derivatives or analogs that are more efficacious than NBT Paclitaxel in
treating cancer would have a material adverse effect on the Company's
business, financial condition and results of operations. Moreover, many of
these competitors, including BMS who currently dominates the paclitaxel
market, have substantially greater capital resources, research and development
capabilities, manufacturing and marketing resources, and experience than the
Company. The Company expects BMS to compete intensely to maintain its
dominance of the paclitaxel market, including through pursuit of an aggressive
patent strategy. The Company's competitors may succeed in obtaining patents
which limit or preclude the Company from producing NBT Paclitaxel or in
developing products that are more effective or less costly than any that may
be developed by the Company, including NBT Paclitaxel, that gain regulatory
approval prior to or that are marketed more successfully than the Company's
products, any of which would have a material adverse effect on the Company's
business, financial condition and results of operations. See "--Uncertainty of
Protection of Patents and Proprietary Technology; Reliance on Trade Secrets"
and "--Uncertainty Related to Australian Patent Proceedings."
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BMS is already marketing paclitaxel commercially in the United States,
Australia, Canada, Europe and certain other territories, and Rhone-Poulenc
Rorer ("RPR"), a large multinational pharmaceutical company, has developed a
proprietary analog of paclitaxel called docetaxel, which has a microtubule
binding mechanism of action similar to that of paclitaxel. In May 1996,
docetaxel, which is marketed by RPR under the trademark Taxotere(R), was
approved by the FDA for treatment of anthracycline-resistant breast cancer in
patients without impaired liver function. In addition, upon expiration in
December 1997 of the marketing protection from generic competition currently
afforded to BMS' paclitaxel compound under the 1984 Waxman-Hatch Amendment
(the "Waxman-Hatch Act") to the Food, Drug and Cosmetic Act (the "FDC Act"),
NBT Paclitaxel, if approved, will be subject to competition from generic
paclitaxel pharmaceuticals in the United States. In Europe, a similar
exclusivity period extends for ten years from approval. The Company is aware
that Mylan Pharmaceuticals, Inc. has entered into an exclusive licensing
agreement with Phytogen International LLC to develop, manufacture and market
generic paclitaxel in the United States, Canada and Mexico. The success of
competitors, including generic manufacturers, in entering the paclitaxel
market may limit or foreclose the Company's market opportunity. See
"Business--Competition" and "Business--Clinical Status of NBT Paclitaxel."
UNCERTAINTY OF PROTECTION OF PATENTS AND PROPRIETARY TECHNOLOGY; RELIANCE
ON TRADE SECRETS. The Company's success depends, in part, on its ability to
obtain patents, maintain trade secret protection and operate without
infringing on the proprietary rights of third parties. Where appropriate, the
Company seeks protection of its proprietary technology by applying for patents
in the United States and abroad. The Company owns three issued United States
patents and has several United States patent applications pending. The Company
has filed patent applications in certain other areas of the world and expects
to make additional filings as it believes appropriate. In addition, the
Company has obtained licenses from third parties to use their proprietary
technology, for which patent applications have been filed in the United States
and in certain other areas of the world. There can be no assurance that either
the Company's or its licensors' existing patent applications will become
issued patents or that, if issued, that the coverage claimed in the
applications will not be significantly reduced prior to issuance, or that the
Company will be able to obtain any necessary or desired additional licenses to
patents or technologies of others or that the Company will be able to develop
its own additional patentable technologies. There can be no assurance that any
future patents issued to the Company, if any, will provide it with competitive
advantages or that products or processes covered by any such patents will not
be challenged as infringing upon the patents or proprietary rights of others,
or that any such patents will not be invalidated, or that the patents or
proprietary rights of others will not have a material adverse effect on the
ability of the Company to do business. Patent applications in the
United States are maintained in secrecy until patents are issued, and patent
applications in certain other countries generally are not published until more
than 18 months after they are filed. In addition, publication of scientific or
patent literature often lags behind actual discoveries. As a result, the
Company cannot be certain it or any of its licensors was the first creator of
inventions covered by the Company's or its licensors' pending patent
applications or that the Company or its licensors were the first to file such
applications. Furthermore, there can be no assurance that others will not
independently develop similar technology or, if patents are issued to the
Company, that others will not design technology to circumvent the Company's
patents or proprietary rights.
A substantial majority of the Company's proprietary technology is not
protected by patents and is held by the Company as trade secrets, including
much of its EIP (TM) technology. The Company's success will depend in part on
its ability to protect trade secrets for extracting, isolating and purifying
paclitaxel and other technology. The Company relies on proprietary know-how
and confidential information and employs various methods, such as entering
into confidentiality and non-compete agreements with its current employees and
with third parties to whom it divulges proprietary information, to protect the
processes, concepts, ideas and documentation associated with its technologies,
including its paclitaxel production process. Such methods may afford
incomplete protection, and there can be no assurance that the Company will be
able to adequately protect its trade
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secrets or that other companies will not acquire or independently develop
information which the Company considers to be proprietary. In addition, if the
Company is unable to fulfill its contractual obligations to IVAX relating to
its supply of NBT Paclitaxel the Company may, under certain circumstances, be
contractually obligated to disclose proprietary manufacturing information to
IVAX. The inability to maintain its trade secrets for its exclusive use could
have a material adverse effect on the Company.
The patent position of pharmaceutical companies generally is highly
uncertain and involves complex legal and factual questions. Paclitaxel is an
unpatentable, naturally occurring compound. A large number of compositions
containing paclitaxel, as well as processes and other technologies, including
those relating to processing paclitaxel and other taxanes and preparing the
drug for finished formulation and administration, are or may be patented.
Certain of these patents are owned by BMS and RPR, two of the Company's
primary competitors. The Company is aware of competitors and potential
competitors who are pursuing patent protection for various aspects of the
extraction, preparation and production of natural and semi-synthesis
paclitaxel. In the event that the Company's technology, products or activities
are deemed to infringe upon the rights of others, including but not limited to
BMS, the Company could be subject to damages or enjoined from using such
technology, or the Company could be required to obtain licenses to utilize
such technology. No assurance can be given that any such licenses would be
made available on terms acceptable to the Company, or at all. If the Company
was unable to obtain such licenses, it could encounter significant delays in
product market introductions while it attempted to design around the patents
or rights infringed upon, or could find the development, manufacture or sale
of products requiring such licenses to be foreclosed. In addition, the Company
could experience a loss of revenues and may incur substantial costs in
defending itself and indemnifying the Strategic Partners in patent
infringement or proprietary rights violation actions brought against it or
either of the Strategic Partners. The Company could also incur substantial
costs in the event it finds it necessary to assert claims against third
parties to prevent the infringement of its patents and proprietary rights by
others. Participation in such infringement proceedings could have a material
adverse effect on the Company, even if the eventual outcome were favorable.
See "--Uncertainty Related to Australian Patent Proceedings," "Business--
Strategic Alliances," "Business--Patents and Proprietary Technology" and
"Business--Australian Petty Patents."
UNCERTAINTY RELATED TO AUSTRALIAN PATENT PROCEEDINGS. In September 1993 and
August 1994, BMS received two Australian petty patents claiming certain
methods of administering paclitaxel. Australian petty patents have a maximum
term of six years, are allowed to contain only three claims (one independent
and two dependent) and are granted on the basis of a prior art search which is
significantly more limited in scope than the searches done prior to issuance
of standard patents. Following publication of these patents, Faulding
instituted legal action to revoke these patents on the grounds that the patent
claims are invalid and that the subject matter claimed in the patents was
already known prior to the claimed date of invention. In February 1995, BMS
brought legal action against Faulding seeking an injunction to prevent
Faulding from marketing NBT Paclitaxel pursuant to Faulding's generic
approval. In March 1995, the Australian court denied BMS's request to enjoin
Faulding from marketing NBT Paclitaxel. The Company believes, based on
communications with Faulding, that BMS's claims will likely be resolved in
conjunction with Faulding's revocation action in late 1996 or early 1997. No
assurance can be given, however, that the BMS matter will be resolved within
this time frame or that BMS will not obtain an injunction against Faulding
which could prevent Faulding from marketing NBT Paclitaxel in Australia. If
Faulding were prevented from marketing NBT Paclitaxel in Australia pursuant to
its generic approval, Faulding would be unable to market NBT Paclitaxel for
commercial sale in Australia until such time as Faulding obtains its own non-
generic approval which would require substantial clinical trials and a lengthy
regulatory approval process. There can be no assurance, however, that Faulding
would be able to obtain its own non-generic approval in such circumstances. If
BMS is successful in enforcing its patent claims against Faulding such that
Faulding is unable to sell NBT Paclitaxel in Australia, such a result would
have a material
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adverse effect on the Company's business, financial condition and results of
operations. See "Business--Strategic Alliances," "Business-- Patents and
Proprietary Technology" and "Business--Australian Petty Patents."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING. The Company has
incurred negative earnings and cash flow from operations since its inception.
Substantial expenditures will be required to enable the Company to scale-up
its manufacturing capabilities, acquire biomass and continue its research and
development activities. The Company anticipates that its existing capital
resources, including preclinical and clinical trial support from the Strategic
Partners and cash generated from operations, together with the net proceeds of
the Offering and interest earned thereon, will be adequate to fund operations
and capital expenditures through the first quarter of 1998. If the Company is
not generating sufficient operating revenues from the sale of NBT Paclitaxel
by the end of the first quarter of fiscal 1998, of which there can be no
assurance, the Company will be required to raise additional capital. The
Company's actual future capital needs, however, will also depend upon many
factors, including the costs and progress of its process and technology
development activities, the cost and success of the Company's plantation
strategy, the progress of the Strategic Partners' clinical development of NBT
Paclitaxel, the timing and receipt of regulatory approvals, the costs involved
in preparing, filing, prosecuting, maintaining, enforcing and defending patent
claims and other intellectual property rights, developments related to
regulatory and reimbursement matters, competing technological and market
developments, changes in or terminations of existing strategic alliances and
the cost, timing and success of manufacturing scale-up, including construction
of a large-scale commercial EIP(TM) manufacturing facility.
Depending on the factors described above, the Company may need to raise
substantial additional funds. The Company may seek additional funding through
public or private financings. If additional funds are raised by issuing equity
securities, further dilution to stockholders will result. Debt financing, if
available, may involve restrictive covenants. If adequate funds are not
available, the Company may obtain funds through arrangements with strategic
partners or others that may require the Company to relinquish rights to
certain of its technologies, any one of which could have a material adverse
effect on the Company's operations. The failure of the Company to raise
capital when needed would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and Financial Statements.
RELIANCE ON FOREIGN SALES. For the year ended December 31, 1995, sales of
NBT Paclitaxel into foreign markets accounted for approximately 75% of the
Company's revenues, and for the three months ended March 31, 1996, sales of
NBT Paclitaxel into foreign markets accounted for approximately 69% of the
Company's revenues. The Company anticipates that a significant portion of its
revenues will continue to be derived from sales of its products in foreign
markets until such time, if ever, as IVAX receives approval for commercial
sale of NBT Paclitaxel in the United States. A substantial portion of the
Company's revenues and operations will thus continue to be subject to the
risks associated with foreign business, including economic or political
instability, shipping delays, changes in foreign regulatory laws governing
sales of drugs, fluctuations in foreign currency exchange rates and various
trade restrictions, all of which could have a significant impact on the
Company's ability to deliver products on a competitive and timely basis.
Future imposition of, or significant increases in, the level of customs
duties, export quotas, drug regulatory restrictions or other regulatory or
trade restrictions could have a material adverse effect on the Company. See
"Business--Strategic Alliances," "Business--Government Regulation and Product
Approvals," "Business--Marketing and Sales" and "Business--Foreign and
Domestic Operations; Export Sales."
UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT. There is significant national
concern today about the availability and rising cost of health care in the
United States. It is anticipated that new federal and/or state legislation
will be proposed to attempt to provide broader and better health care and to
15
<PAGE>
manage and contain its cost. While the Company cannot predict whether any such
legislative or regulatory proposals will be adopted or the effect such
proposals may have on its business, the pendency or adoption of such proposals
could have a material adverse effect on the Company, including its ability to
raise capital, or on the market value of the Common Stock.
In both domestic and foreign markets, sales of the Company's product
candidates will depend in part on the availability of reimbursement from
third-party payors such as government health administration authorities,
private health insurers and other organizations. Third-party payors are
increasingly challenging the price and cost-effectiveness of medical products
and services. Significant uncertainty exists as to the reimbursement status of
newly approved health care products. There can be no assurance that NBT
Paclitaxel will be considered cost-effective or that adequate third-party
reimbursement will be available to enable the Company to maintain price levels
sufficient to realize an appropriate return on its investment in product
development. Failure to achieve sufficient price levels for NBT Paclitaxel
would have a material adverse effect on the Company's business, results of
operations and financial condition. Legislation and regulations affecting the
pricing of pharmaceuticals may change before NBT Paclitaxel is approved for
marketing. Adoption of such legislation or regulations could further limit
reimbursement for medical products and services.
RISK OF PRODUCT LIABILITY; LIMITED INSURANCE. The Company's business
exposes it to potential product liability risks which are inherent in the
testing, manufacturing, marketing and sale of therapeutic products. While the
Company will continue to take precautions it deems appropriate, there can be
no assurance that it will be able to avoid significant product liability
exposure. Pursuant to the agreements with the Strategic Partners, the Company
is required to indemnify the Strategic Partners for any defect in the NBT
Paclitaxel that is shipped to Faulding or IVAX. Under such agreements, the
Company will be indemnified by the Strategic Partners against certain product
liability claims brought against the Company to the extent such liability is a
result of actions by the Strategic Partners once they receive NBT Paclitaxel
from the Company. The Company currently maintains product liability insurance
in the amount of $5.0 million per policy year. Product liability insurance for
the pharmaceutical industry, however, generally is expensive, to the extent it
is available at all. There can be no assurance that the Company will be able
to maintain such insurance on acceptable terms, that it will be able to secure
increased coverage as the commercial approval process for NBT Paclitaxel
progresses or that its insurance policy will provide adequate protection
against potential claims. A successful claim brought against the Company in
excess of the Company's insurance coverage or a product recall could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Business--Strategic Alliances."
DEPENDENCE ON MANAGEMENT AND KEY PERSONNEL; ABILITY TO MANAGE GROWTH. The
Company is highly dependent upon the services of its senior executives and
certain key scientific personnel, particularly its Chairman, Leonard P.
Shaykin, and its President and Chief Executive Officer, Sterling K. Ainsworth.
The Company maintains a key-man life insurance policy on the life of Dr.
Ainsworth in the amount of $3.0 million. Although the Company has entered into
employment contracts with Mr. Shaykin, Dr. Ainsworth, Dr. Patricia A. Pilia,
the Company's Vice President, BioResearch and Toxicology, and Dr. Lawrence
Helson, the Company's Vice President, Clinical Research (collectively, the
"Senior Executives"), which expire in June 1998 (collectively, the "Executive
Agreements"), the loss of the services of any of the Senior Executives or
other of the Company's key employees could have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, Mr. Shaykin and Dr. Helson serve the Company on a part-time basis
and each of them has obligations which could divert their attention from the
Company's affairs to the Company's detriment. The Company's move to large-
scale commercial operations will depend upon, among other things, the
successful recruiting of highly skilled managerial and technical personnel
with experience in business activities such as those contemplated by the
Company. Although the Company has hired a number of individuals which the
Company believes have the requisite skills and experience to allow the Company
to expand its operations to a commercial scale, competition for the
16
<PAGE>
type of highly skilled individuals required by the Company is intense among
pharmaceutical companies, health care companies, government agencies, academic
institutions and other organizations. There can be no assurance that the
Company will be able to retain existing employees or that it will be able to
find, attract and retain other skilled personnel on acceptable terms to help
the Company manage its growth. See "Management."
CONTINUING CONTROL BY EXISTING STOCKHOLDERS; CONFLICT OF INTEREST. The
Company's executive officers and directors beneficially own approximately
29.1% of the Common Stock and will own approximately 25.1% after giving effect
to the Offering. In addition, IVAX, one of the Strategic Partners,
beneficially owns approximately 11.2% of the Common Stock. In the event that
such stockholders were to act in concert with respect to the Company's
operations, they would be in a position generally to substantially influence
the affairs of the Company. In addition, Phillip Frost, M.D. and Richard C.
Pfenniger, Jr., each a director of the Company, serve as the Chairman and
Chief Executive Officer of IVAX and as President, Health Care Group of IVAX,
respectively. There can be no assurance that conflicts of interest will not
arise with respect to the foregoing or that such conflicts will be resolved in
a manner favorable to the Company. See "Business--Strategic Alliances,"
"Management" and "Principal Stockholders."
ANTI-TAKEOVER CONSIDERATIONS; AUTHORIZATION OF PREFERRED STOCK. Certain
provisions of the Company's Amended and Restated Certificate of Incorporation
(the "Certificate of Incorporation"), Bylaws (the "Bylaws") and Section 203 of
the Delaware General Corporation Law (the "DGCL") could discourage potential
acquisition proposals and could delay or prevent a change in control of the
Company. The Company's board of directors, without further stockholder
approval, may issue blank check preferred stock that could have the effect of
delaying or preventing a rapid change in control of the Company as well as
adversely affecting the voting power of the holders of Common Stock, including
the loss of voting control to others. In addition, the Certificate of
Incorporation, as amended, and bylaws will provide for a classified Board of
Directors consisting of three classes of directors serving staggered terms.
The Company's directors may be removed only for cause by stockholders holding
not less than 80% of the shares entitled to elect the director or directors
whose removal is sought. See "Description of Capital Stock--Certain
Certificate of Incorporation, Bylaw and Statutory Provisions Affecting
Stockholders."
The Company is considering the adoption of a rights plan (the "Rights
Plan"), which, if adopted by the Board of Directors, would not require
stockholder approval. The Rights Plan would have both a "flip-in" and "flip-
over" provision. Existing stockholders as of a selected record date would
receive the right (a "Right") to purchase a fractional share of a new series
of preferred stock at a purchase price as yet to be determined for each share
of Common Stock held. For the "flip-in provision," the Rights would become
exercisable only if a person or group acquires beneficial ownership of a
specified percentage (the "Threshold Percentage") of the outstanding Common
Stock. In that event, all holders of Rights other than the person or group who
acquired the Threshold Percentage would be entitled to purchase shares of
Common Stock at a substantial discount to the then current market price. This
right would be triggered a specified number of days following the passing of
the Threshold Percentage. For the "flip-over" provision, if the Company was
acquired in a merger or other business combination or transaction, the holders
of such Rights would be entitled to purchase shares of the acquiror's common
stock at a substantial discount.
In addition, the Executive Agreements provide for continuation of salary
and other benefits in the event employment is terminated under certain
circumstances, including a change of control of the Company. Furthermore, in
connection with its equity investment in the Company, IVAX agreed that for a
period ending on the earlier of June 7, 2000 or three years after the date
IVAX receives FDA approval to market NBT Paclitaxel commercially in the United
States, neither it nor any affiliate will, without the approval of a majority
of disinterested directors, among other things, (i) acquire, in the aggregate,
more than 20.0% of the Common Stock, (ii) seek control of the Board of
Directors, or (iii) propose an acquisition of all or substantially all of the
Company's assets, a merger or other
17
<PAGE>
business combination, or a tender offer for the Common Stock. See
"Management--Compensation of Executive Officers," "Certain Relationships and
Related Transactions" and "Description of Capital Stock."
DILUTION. The Offering price will be substantially higher than the book
value per share of Common Stock. Investors purchasing shares of Common Stock
in the Offering will therefore incur immediate and substantial dilution of
$7.23 per share. See "Dilution."
ABSENCE OF DIVIDENDS. The Company has never paid cash dividends on its
Common Stock. It is the Company's intention to retain earnings, if any, to
finance the operation and expansion of its business and, therefore, it does
not expect to pay cash dividends in the foreseeable future. In addition,
future credit facilities may restrict dividend payments. See "Dividend
Policy."
VOLATILITY OF STOCK PRICE. The market price of the Common Stock has been,
and will likely continue to be, volatile. Factors such as the Company's
financial results, introduction of new products by its competitors, results of
clinical trials, government regulations, changes in reimbursement policies,
developments in patent and other proprietary rights, developments in the
Company's relationships with the Strategic Partners, public concern as to the
safety and efficacy of paclitaxel and various factors affecting the
biotechnology or pharmaceutical industries generally, may have a significant
impact on the market price of the Common Stock. Additionally, in recent years,
the stock market has experienced a high level of price and volume volatility
and market prices for the stock of many companies (particularly of small and
emerging growth companies, the common stock of which trade in the over-the-
counter-market) have experienced wide price fluctuations which have not
necessarily been related to the operating performance of such companies. See
"Price Range of Common Stock."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS. Sales of Common Stock
in the public market following the Offering, or the perception that such sales
could occur, could have an adverse effect on the price of the Common Stock or
on the Company's ability to raise capital. Upon completion of the Offering,
the Company will have 12,036,117 shares of Common Stock outstanding (assuming
no exercise of the Underwriters' over-allotment option). Of these shares, the
1,600,000 shares to be sold in the Offering and, as of June 30, 1996,
approximately 6,750,840 additional shares of Common Stock, will be or are
freely tradeable without restriction or further registration under the
Securities Act of 1933, as amended (the "Securities Act"). The remaining
3,685,277 outstanding shares of Common Stock eligible for sale are restricted
shares ("Restricted Shares") under the Securities Act and may only be sold if
they are registered or qualify for an exemption from registration under Rule
144 or Rule 701 of the Securities Act. The Company's directors and executive
officers and certain stockholders who immediately after this Offering will
hold in the aggregate 2,577,412 shares of Common Stock (excludes the 50,000
shares subject to the Underwriter's over-allotment option, if exercised,
488,531 shares which have been pledged to the Company and 606,000 which have
been pledged to certain third parties) of which 2,577,412 are Restricted
Shares, have agreed not to sell any of these shares for 90 days after the date
of this Prospectus (the "Lock-Up Period") without the prior written consent of
Vector Securities International, Inc. The shares pledged to third parties
could be sold, subject to certain volume, manner of sale and other limitations
under Rule 144, if the owners of such shares were to default on the
obligations underlying the pledges. Commencing 91 days from the date of this
Prospectus, 1,729,781 of the Restricted Shares subject to such lock-up
agreements will be available for immediate sale in the public market, subject
to certain volume, manner of sale and other limitations under Rule 144. In
addition, Faulding, the beneficial owner of 395,000 shares of Nonvoting Common
Stock and warrants to purchase 400,000 shares of Nonvoting Common Stock, has
agreed not to sell any of such shares or warrants (including shares underlying
such warrants) for a period ending October 25, 1996. See "Description of
Capital Stock" and "Underwriting."
In addition, the Company has granted to certain of its security holders,
including the Senior Executives and IVAX, certain registration rights with
respect to an aggregate of up to approximately 3,543,000 shares of Common
Stock and approximately 20,000 shares of Common Stock issuable upon
18
<PAGE>
exercise of warrants, and has granted Whale Securities, Inc. ("Whale
Securities"), the underwriter in the Company's initial public offering in
August 1994 (the "IPO"), certain demand and piggyback registration rights with
respect to the warrants received by Whale Securities (the "Whale Warrants") in
the IPO and the Common Stock underlying the Whale Warrants. The 360,000 shares
of Common Stock underlying the Whale Warrants are currently registered for
sale under the Securities Act. Such stockholders and warrantholders (excluding
22,890 Whale Warrants and 22,890 shares of Common Stock underlying the Whale
Warrants) have agreed not to exercise their registration rights or dispose of
their shares or warrants until after the expiration of the Lock-Up Period. See
"Principal Stockholders" and "Description of Capital Stock--Registration
Rights."
19
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,600,000 shares of
Common Stock offered hereby are estimated to be approximately $12.6 million
($14.1 million if the Underwriters' over-allotment option is exercised in
full), after deducting underwriting discounts and commissions and the
estimated expenses of the Offering. The Company will not receive any proceeds
from the sale by certain stockholders of shares subject to the Underwriters'
over-allotment option. See "Underwriting."
The net proceeds received by the Company will be utilized: (i) to fund
capital expenditures, including the construction of a large-scale commercial
EIP(TM) manufacturing facility; (ii) to fund development of ornamental yew
tree plantations; and (iii) for general corporate purposes. Pending such
utilization, the Company intends to invest such proceeds in short-term
interest-bearing investment grade securities.
The Company anticipates that its existing capital resources, including
preclinical and clinical support from the Strategic Partners and cash
generated from operations, together with the net proceeds of the Offering and
interest earned thereon, will be adequate to fund operations and capital
expenditures through the first quarter of 1998. If the Company is not
generating sufficient operating revenues from the sale of NBT Paclitaxel by
the end of the first quarter of fiscal 1998, of which there can be no
assurance, the Company will be required to raise additional capital. The
Company's actual future capital needs, however, will also depend upon many
factors, including the costs and progress of its product, process and
technology development activities, the cost and success of the Company's
plantation strategy, the progress of the Strategic Partners' clinical
development of NBT Paclitaxel, the timing and receipt of regulatory approvals,
the costs involved in preparing, filing, prosecuting, maintaining, enforcing
and defending patent claims and other intellectual property rights,
developments related to regulatory and reimbursement matters, competing
technological and market developments, changes in or terminations of existing
strategic alliances and the cost, timing and success of manufacturing scale-
up, including construction of a large-scale commercial EIP(TM) manufacturing
facility. There can be no assurance, that the Company, if required, will be
able to raise additional capital on acceptable terms, or at all. See "Risk
Factors--Future Capital Needs; Uncertainty of Additional Funding."
20
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company completed its initial public offering on August 1, 1994. The
Common Stock is traded on the Nasdaq Small Cap under the symbol "NPRO." The
following table sets forth, for the fiscal periods indicated, the high and low
sale prices for the Common Stock on the Nasdaq Small Cap. On July 31, 1996,
the last reported sale price of the Common Stock on the Nasdaq Small Cap was
$10.00 per share. The Common Stock has been approved for listing on the Nasdaq
National Market under the symbol "NPRO," subject to commencement of the
Offering.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1994
----
Third Quarter (from August 1, 1994)...................... $ 6 5/8 $4 7/8
Fourth Quarter........................................... 6 3/8 6
1995
----
First Quarter............................................ $ 6 5/8 $6
Second Quarter........................................... 10 1/8 6 1/8
Third Quarter............................................ 12 3/4 9 3/8
Fourth Quarter........................................... 12 1/8 8 7/8
1996
----
First Quarter............................................ $13 3/8 $8 7/8
Second Quarter .......................................... 17 1/2 10 3/4
Third Quarter (through July 31, 1996).................... 16 8 7/8
</TABLE>
On July 31, 1996, there were approximately 150 holders of record of the
Common Stock.
DIVIDEND POLICY
To date, the Company has not paid any dividends on the Common Stock. The
Company intends to retain future earnings, if any, to finance the operation
and expansion of its business and, therefore, does not anticipate paying any
cash dividends in the foreseeable future, if at all.
21
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1996: (i) the capitalization
of the Company; (ii) such capitalization adjusted to give pro forma effect to
the redemption or exercise of the Redeemable Warrants on or prior to the
Warrant Redemption Date; and (iii) such pro forma capitalization as further
adjusted to give effect to the sale of 1,600,000 shares of Common Stock
offered by the Company hereby and the receipt of the net proceeds therefrom.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
---------------------------------
PRO PRO FORMA
ACTUAL FORMA(1) AS ADJUSTED(2)
------- -------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt, net of current portion(3).. $ 1,739 $ 1,739 $ 1,739
Minority interest(4)....................... 3,715 3,715 3,715
Stockholders' equity (deficit):
Preferred Stock, $.001 par value;
2,000,000 shares authorized;
125,000 shares issued and outstanding
actual, pro forma, and pro forma as
adjusted (preference in liquidation
$1,000,000).............................. -- -- --
Common Stock, $.0075 par value; 19,000,000
shares authorized; 8,529,932 shares
issued, actual; 10,167,654 shares issued,
pro forma; 11,767,654 shares issued, pro
forma as adjusted(5)..................... 64 76 88
Nonvoting Common Stock, $.0075 par value;
1,000,000 shares authorized; 400,000
shares issued and outstanding actual, pro
forma, and pro forma as adjusted......... 3 3 3
Additional paid-in capital................ 26,681 29,742 42,300
Unearned compensation..................... (7) (7) (7)
Notes receivable from stockholders........ (941) (941) (941)
Treasury Stock--144,288 shares actual, pro
forma, and pro forma as adjusted......... (1,684) (1,684) (1,684)
Accumulated deficit....................... (20,460) (20,460) (20,460)
------- ------- -------
Net stockholders' equity................. 3,656 6,729 19,299
------- ------- -------
Total capitalization................... $ 9,110 $12,183 $24,753
======= ======= =======
</TABLE>
- --------
(1) Gives pro forma effect to the issuance of 630,620 shares of Common Stock
and the receipt of $3,073,100 (net of offering costs of $80,000) in cash
pursuant to Cash Exercise elections and to the issuance of 1,007,102
shares of Common Stock pursuant to Cash-less Exercise elections of holders
of the Redeemable Warrants prior to the Warrant Redemption Date. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Description of Capital Stock--Redeemable Warrants."
(2) As adjusted to give effect to the sale of 1,600,000 shares of Common Stock
offered by the Company hereby, after deducting underwriting discounts and
commissions and the estimated expenses of the Offering. See "Use of
Proceeds."
(3) See Note 3 of the Notes to Financial Statements for a description of the
Company's long-term debt obligations.
(4) Related to outstanding shares of preferred stock of NaPro Canada
exchangeable into an equivalent number of shares of Common Stock of the
Company. See Note 6 of Notes to Financial Statements.
(5) Based upon shares outstanding as of March 31, 1996. Does not include: (i)
125,000 shares of Common Stock issuable upon conversion of the Company's
Convertible Preferred Stock, Series A outstanding as of March 31, 1996;
(ii) 459,092 shares of Common Stock issuable upon conversion of NaPro
Canada's Convertible Preferred Stock, Series A outstanding as of March 31,
1996; (iii) 595,440 shares of Common Stock which were subject to
outstanding options as of March 31, 1996, at exercise prices ranging from
$0.19 to $11.75 per share, with a weighted average exercise price of $5.37
per share; (iv) 180,446 shares of Common Stock issuable upon exercise of
warrants outstanding as of March 31, 1996, at exercise prices ranging from
$0.07 to $9.37 per share, with a weighted average exercise price of $0.74
per share; (v) 400,000 shares of Nonvoting Common Stock issuable upon
exercise of the Faulding Warrants outstanding as of March 31, 1996, at an
exercise price of $5.00 per share; and (vi) 360,000 shares of Common Stock
issuable upon the exercise of the Whale Warrants outstanding as of March
31, 1996, at an exercise price of $7.50 per share. See "Risk Factors--
Shares Eligible for Future Sale; Registration Rights," "Management--
Directors' Compensation," "Management--1993 Stock Option Plan,"
"Management--Compensation of Executive Officers," "Description of Capital
Stock--Company Preferred Stock; NaPro Canada Preferred Stock" and
"Description of Capital Stock--Redeemable Warrants."
22
<PAGE>
DILUTION
The pro forma net tangible book value of the Company at March 31, 1996 was
$5.7 million or $0.55 per share. Pro forma net tangible book value per share
is equal to the Company's pro forma net tangible assets (pro forma tangible
assets of the Company less total liabilities, reduced by the $1.0 million
preference in liquidation of the outstanding preferred stock) divided by the
number of shares of Common Stock outstanding on a pro forma basis, after
giving effect to the redemption or exercise of the Redeemable Warrants.
Without taking into account any other changes in pro forma net tangible book
value after March 31, 1996 other than to give effect to the sale of the
1,600,000 shares of Common Stock by the Company in the Offering and the
receipt of the estimated net proceeds therefrom, the pro forma net tangible
book value of the Company as of March 31, 1996 would have been $18.3 million,
or $1.52 per share. This represents an immediate increase in pro forma net
tangible book value of $0.97 per share to existing stockholders and an
immediate dilution in pro forma net tangible book value of $7.23 per share to
new investors. The following table sets forth the per share dilution to new
investors in the Offering:
<TABLE>
<S> <C> <C>
Offering price per share........................................ $8.75
Pro forma net tangible book value per share as of March 31,
1996........................................................... $0.55
Increase per share attributable to new investors.............. 0.97
-----
Pro forma net tangible book value per share after the Offering.. 1.52
-----
Dilution per share to new investors............................. $7.23
=====
</TABLE>
The foregoing computations exclude: (i) 125,000 shares of Common Stock
issuable upon conversion of the Company's Convertible Preferred Stock, Series
A outstanding as of March 31, 1996; (ii) 459,092 shares of Common Stock
issuable upon conversion of NaPro Canada's Convertible Preferred Stock, Series
A outstanding as of March 31, 1996; (iii) 595,440 shares of Common Stock which
were subject to outstanding options as of March 31, 1996, at exercise prices
ranging from $0.19 to $11.75 per share, with a weighted average exercise price
of $5.37 per share; (iv) 180,446 shares of Common Stock issuable upon exercise
of warrants outstanding as of March 31, 1996, at exercise prices ranging from
$0.07 to $9.37 per share with a weighted average price of $0.74 per share; (v)
400,000 shares of Nonvoting Common Stock issuable upon the exercise of the
Faulding Warrants outstanding as of March 31, 1996 at an exercise of $5.00 per
share; and (vi) 360,000 shares of Common Stock issuable upon the exercise of
the Whale Warrants outstanding as of March 31, 1996 at an exercise price of
$7.50 per share. To the extent that such options and warrants are exercised,
there will be further dilution to new investors. See "Management--Directors'
Compensation," "Management--1993 Stock Option Plan," "Management--Compensation
of Executive Officers," "Description of Capital Stock--Company Preferred
Stock; NaPro Canada Preferred Stock" and "Description of Capital Stock--
Redeemable Warrants."
23
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below for each fiscal year in the
five-year period ended December 31, 1995 are derived from the Company's
financial statements, which have been audited by Ernst & Young LLP,
independent auditors, and are qualified by reference to such Financial
Statements and Notes thereto. The selected financial data presented below for
the three months ended March 31, 1995 and 1996 are derived from the Company's
unaudited financial statements which reflect all adjustments, consisting only
of normal recurring adjustments, the Company considers necessary for a fair
presentation of the financial position of the Company as of those dates and
the results of operations of the Company for those periods. Operating results
for the three months ended March 31, 1996 are not necessarily indicative of
the results that may be expected for the entire year ending December 31, 1996.
The data presented below should be read in conjunction with the consolidated
financial statements at December 31, 1994 and 1995 and for each of the three
years in the period ended December 31, 1995, the related Notes thereto,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other financial information included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ ---------------
1991 1992 1993 1994 1995 1995 1996
------ ------- ------- ------- ------- ------ -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Sales of products...... $ 112 $ 363 $ 1,248 $ 1,002 $ 2,623 $1,148 $ 691
Other.................. 12 202 1 5 -- -- --
------ ------- ------- ------- ------- ------ -------
Total revenues........ 124 565 1,249 1,007 2,623 1,148 691
Operating expenses:
Research, development
and cost of products
sold.................. 611 1,670 3,505 2,707 4,325 1,074 1,786
General and administra-
tive.................. 261 1,215 2,690 2,044 2,310 451 704
Faulding royalty....... -- -- -- 1,000 -- -- --
Plantation costs....... -- -- 7 1,238 272 269 --
------ ------- ------- ------- ------- ------ -------
Total operating ex-
penses............... 872 2,885 6,202 6,989 6,907 1,794 2,490
------ ------- ------- ------- ------- ------ -------
Operating loss.......... (748) (2,320) (4,953) (5,982) (4,284) (646) (1,799)
Other income (expense):
Interest income........ 5 24 79 188 373 49 100
Interest and other ex-
pense................. -- -- (34) (340) (160) (40) (61)
------ ------- ------- ------- ------- ------ -------
Loss before extraordi-
nary item.............. (743) (2,296) (4,908) (6,134) (4,071) (637) (1,760)
Loss on early extin-
guishment of debt...... -- -- -- (512) -- -- --
------ ------- ------- ------- ------- ------ -------
Net loss................ $ (743) $(2,296) $(4,908) $(6,646) $(4,071) $ (637) $(1,760)
====== ======= ======= ======= ======= ====== =======
Loss per share:
Before extraordinary
item.................. $(0.22) $ (0.38) $ (0.79) $ (0.91) $ (0.51) $(0.08) $ (0.21)
Extraordinary item..... -- -- -- (0.08) -- -- --
------ ------- ------- ------- ------- ------ -------
Net loss(1)........... $(0.22) $ (0.38) $ (0.79) $ (0.99) $ (0.51) $(0.08) $ (0.21)
====== ======= ======= ======= ======= ====== =======
Weighted average shares
outstanding(1)......... 3,439 6,103 6,201 6,761 7,973 7,713 8,527
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------------------------------- ---------
1991 1992 1993 1994 1995 1996
------ ------- ------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents
and short-term
securities............. $ 956 $ 86 $ 18 $ 1,400 $ 7,800 $ 5,590
Working capital......... 799 (26) (435) 3,169 8,452 6,731
Total assets............ 1,356 918 2,120 4,976 11,953 10,206
Long-term obligations,
net of current
maturities............. 152 709 1,435 1,273 1,618 1,739
Minority interest....... -- -- -- -- 3,715 3,715
Accumulated deficit..... (779) (3,075) (7,983) (14,629) (18,700) (20,460)
Stockholders' equity
(deficit).............. 909 (190) (944) 3,037 5,424 3,656
</TABLE>
- --------
(1)See Note 1 of the Notes to Financial Statements for information concerning
the computation of net loss per share.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and Notes thereto included elsewhere in this Prospectus. Special
Note: Certain statements set forth below constitute "forward-looking
statements" within the meaning of the Reform Act. See "Special Note Regarding
Forward-Looking Statements" on page 2 for additional factors relating to such
statements.
GENERAL
Since its inception, the Company has devoted its efforts primarily to the
development and implementation of its EIP(TM) technology for producing NBT
Paclitaxel. The Company is currently dependent exclusively on sales of NBT
Paclitaxel for revenues. Through March 31, 1996, the Company's production of
NBT Paclitaxel was limited primarily to research and pilot-scale production,
and most of the Company's product sales were for use in clinical trials and
for research and development purposes. To date, substantially all of the sales
of NBT Paclitaxel have been to the Strategic Partners. The Company has
generated only limited revenues from such activities and has incurred
significant operating losses, including operating losses of approximately $5.0
million, $6.0 million and $4.3 million for the years ended December 31, 1993,
1994 and 1995, respectively, and $1.8 million for the three months ended March
31, 1996, resulting in an accumulated deficit of $20.5 million as of March 31,
1996. The Company expects that it will continue to have a high level of
operating expenses and will be required to make significant expenditures in
connection with the construction of large-scale commercial EIP(TM)
manufacturing facilities, the development of ornamental yew tree plantations,
product development and research and development activities. The Company
anticipates that operating losses will continue until such time, if ever, as
the Company is able to generate sufficient revenues to support its operations.
The Company believes that its ability to generate such revenues depends
primarily on the ability of its Strategic Partners to obtain regulatory
approval for the commercial sale of NBT Paclitaxel, the Company's ability to
obtain regulatory approval for its manufacturing facilities, and on the
Company's ability to construct manufacturing facilities that produce
quantities of NBT Paclitaxel sufficient to supply the Strategic Partners'
requirements for commercial sales. Moreover, the Company's future growth and
profitability will depend on the success of the Strategic Partners in
fostering acceptance in the oncological market for NBT Paclitaxel as a form of
chemotherapy.
The Company recognizes revenue as product is shipped. Shipments to the
Strategic Partners are variable depending on the progress of clinical trials
and commercial requirements. This variability has resulted in volatility in
revenue, between quarters and between fiscal years. Such variability is
expected to continue until such time, if ever, as the market for NBT
Paclitaxel has been established in a major market. Payments for product used
in clinical development and research are at a fixed price which is
substantially below the commercial price for sales in Australia. The
commercial selling price is dependent upon a number of factors including the
average wholesale price of the drug sold by the Strategic Partners, which will
vary over time by location, by Strategic Partner and by competitive forces.
In January 1995, Faulding received approval to market NBT Paclitaxel
commercially in Australia under the trade name ANZATAX(TM). Until such time,
if ever, that NBT Paclitaxel receives regulatory approvals in major markets,
the ability of Faulding to continue to market NBT Paclitaxel in Australia
pursuant to Faulding's marketing approval and the success of these marketing
efforts will have a material effect on the Company's revenues, profitability
and capital requirements.
In July and August of 1995, the Company completed private placements of two
series of preferred stock. The proceeds of these offerings were used to
establish and upgrade Canadian and United States
25
<PAGE>
manufacturing facilities and to fund the Company's operating expenditures,
planned capital expenditures and additional plantation development.
RECENT DEVELOPMENTS
On May 23, 1996 (the "Call Date"), the Company called for redemption (the
"Redemption") all of the Company's outstanding 2,070,000 redeemable warrants
(the "Redeemable Warrants"). During the period (the "Call Period") following
the Call Date and ending at 5:00 p.m. on June 24, 1996 (the "Warrant
Redemption Date"), each holder of Redeemable Warrants had the right to elect
one, or a combination of, the following two options: (i) to exercise the
Redeemable Warrants for the exercise price of $5.00 per share (the "Cash
Exercise") or (ii) to exercise the Warrants in a cash-less exchange by
surrendering the Redeemable Warrants to the Company in exchange for 0.70
shares of Common Stock per Redeemable Warrant (the "Cash-less Exercise"). No
holder of Redeemable Warrants was obligated to exercise the Redeemable
Warrants. If any holder of Redeemable Warrants did not choose Cash Exercise or
Cash-less Exercise during the Call Period, however, such holder's Redeemable
Warrants were redeemed by the Company at $0.10 per Redeemable Warrant. No
fractional shares were issued as a result of the Cash-less Exercise. Pursuant
to the Redemption, 630,620 Redeemable Warrants were exercised pursuant to Cash
Exercise elections resulting in $3,073,100 (net of offering costs of $80,000)
of proceeds to the Company and the issuance of 630,620 shares of Common Stock
and 1,438,720 Redeemable Warrants were exercised pursuant to Cash-less
Exercise elections, resulting in the issuance of 1,007,102 shares of Common
Stock. See "Description of Capital Stock--Redeemable Warrants."
RESULTS OF OPERATIONS
The Company was in the development stage through December 31, 1994. In
January 1995, the Company commenced commercial sales of NBT Paclitaxel to
Faulding for sale by Faulding in Australia. Comparison of operations between
years and historical trends do not necessarily indicate future trends and
operating results of the Company.
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31,
1995
Revenue. Operating revenues decreased $0.4 million to $0.7 million for the
three months ended March 31, 1996 from $1.1 million for the three months ended
March 31, 1995. This decrease was attributable primarily to the timing of
product deliveries to the Strategic Partners, which may vary significantly
from quarter to quarter. Although initial commercial sales commenced in
January 1995 in Australia, the Company expects these sales to be unpredictable
until such time as the markets of the Strategic Partners have been established
and proven.
Research, Development and Cost of Products Sold. Research, development and
cost of products sold expenses increased $0.7 million to $1.8 million for the
three months ended March 31, 1996 from $1.1 million for the three months ended
March 31, 1995. The increase was due primarily to an increase in production
volumes.
General and Administrative Expenses. General and administrative expenses
("G&A") increased $0.2 million to $0.7 million for the three months ended
March 31, 1996, from $0.5 million for the three months ended March 31, 1995.
This increase was due primarily to an increase in costs associated with the
occupation of the Company's new facility in Boulder, Colorado and an increase
in administrative and support staff to support the Company's growth.
Plantation Costs. The Company did not incur any plantation costs for the
three months ended March 31, 1996 as a result of the completion of research
related to plantation development as of
26
<PAGE>
December 31, 1995. The Company performed a pilot harvest of the PBI plantation
in 1996 and believes the technology has been adequately developed to assure
the plantation can function as a long-term renewable source of biomass and,
consequently, future plantation development and maintenance payments will be
capitalized and amortized over the expected life of the plantation as biomass
is harvested.
Interest Income. Interest income increased from $50,000 to $0.1 million for
the three months ended March 31, 1996. This increase was the result of larger
free cash balances. Interest income will increase as a result of receipt of
the proceeds from the Offering.
Interest and Other Expenses. Interest and other expenses increased slightly
for the three months ended March 31, 1996 from the three months ended March
31, 1995. The increase was the result of new borrowings under equipment
financing leases which were put in place in the fourth quarter of 1995 to
finance the purchase of laboratory, administrative and manufacturing
equipment. Interest expense is expected to increase as borrowings on the
equipment lease line of credit are expected to increase from approximately
$0.3 million at December 31, 1995 to approximately $1.5 million at June 30,
1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenue. Operating revenues increased $1.6 million to $2.6 million for the
year ended December 31, 1995 from $1.0 million for the year ended December 31,
1994. The increase was attributable primarily to the timing of product
deliveries to the Strategic Partners, as well as higher prices associated with
commercial sales of ANZATAX(TM) in Australia. Through December 31, 1995, the
majority of product sales had been for use in clinical trials and for research
and development purposes. Although initial commercial sales commenced in
January 1995 in Australia, the Company expects these sales to be unpredictable
until such time as the markets of the Strategic Partners have been established
and proven.
Research, Development and Cost of Products Sold. Research, development and
cost of products sold expenses increased $1.6 million to $4.3 million for the
year ended December 31, 1995 from $2.7 million for the year ended December 31,
1994. The increase was due primarily to an increase in the level of process
development research costs, although the Company also experienced higher
production costs due to higher production volumes.
General and Administrative Expenses. G&A increased $0.3 million to $2.3
million for the year ended December 31, 1995 from $2.0 million for the year
ended December 31, 1994. The increase was due primarily to a general increase
in administrative and related support staff to support the Company's growth.
Faulding Royalty Expense and Plantation Costs. Plantation costs decreased
$0.9 million to $0.3 million for the year ended December 31, 1995 from $1.2
million for the year ended December 31, 1994. The decrease reflects the
absence of significant costs incurred during fiscal 1994 related to the
establishment of the PBI plantation. The $0.3 million in costs incurred in
fiscal 1995 primarily reflect costs of ongoing maintenance of the plantation
(see Note 8 to the Financial Statements). Additionally, there was no Faulding
royalty expense during fiscal 1995 because the Faulding royalty expense was a
one-time charge taken in 1994.
Interest Income. Interest income increased $0.2 million to $0.4 million for
the year ended December 31, 1995 from $0.2 million for the year ended December
31, 1994. This increase was the result of larger average free cash balances,
relating to receipt of the proceeds in July 1995 and August 1995 from private
placements of the Company's preferred stock and the preferred stock of its
Canadian subsidiary.
27
<PAGE>
Interest and Other Expenses. Interest and other expenses decreased $0.1
million to $0.2 million for the year ended December 31, 1995 from $0.3 million
for the year ended December 31, 1994. The decrease resulted from the repayment
of bridge loans in 1994.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Revenues. Operating revenues decreased $0.2 million to $1.0 million for the
year ended December 31, 1994 from $1.2 million for the year ended December 31,
1993. The decrease was attributable primarily to the timing of product
deliveries to the Strategic Partners.
Research, Development and Cost of Products Sold. Research, development and
cost of product sold expenses decreased $0.8 million to $2.7 million for the
year ended December 31, 1994 from $3.5 million for the year ended December 31,
1993. The decrease was due primarily to decreases in production volumes of NBT
Paclitaxel for research purposes, as well as the absence of costs associated
with the early stage NBT Paclitaxel product development efforts which were
substantially completed in 1993.
General and Administrative Expenses. G&A decreased $0.7 million to $2.0
million for the year ended December 31, 1994 from $2.7 million for the year
ended December 31, 1993. The decrease was attributable primarily to a decrease
in legal costs relating to the negotiation of the agreements with the
Strategic Partners and certain intellectual property dispute proceedings that
were completed in 1994.
Faulding Royalty Expense and Plantation Costs. During 1994, the Company
recorded a $1.0 million nonrecurring expense for the elimination of the
Faulding royalty (see Note 6 to the Financial Statements) and $1.2 million for
plantation development expenses relating to the start-up of the PBI plantation
(see Note 8 to the Financial Statements).
Interest Income. Interest income increased $0.1 million to $0.2 million for
the year ended December 31, 1994 from $0.1 million for the year ended December
31, 1993. The increase was a result of increased average free cash balances
associated with the net proceeds of the IPO and other financings.
Interest and Other Expenses. Interest and other expenses increased from
$34,000 to $0.3 million for the year ended December 31, 1994. The increase was
primarily the result of interest expense associated with the bridge notes
outstanding from March through August 1994.
Extraordinary Expense. During 1994, the Company incurred an extraordinary
loss on early extinguishment of debt totaling $0.5 million (See Note 6 to the
Financial Statements), resulting from one-year bridge notes issued in March
and April of 1994, which were prepaid, at a premium, in connection with the
IPO.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements have been and will continue to be
significant. As of March 31, 1996, the Company had a working capital balance
of $6.7 million and had capital expenditures for the first quarter of 1996 of
$0.1 million. This compared to a working capital balance of $2.4 million as of
March 31, 1995. To date, the Company has been dependent primarily on the net
proceeds from the IPO of approximately $7.4 million, net proceeds from private
placements of its equity securities aggregating approximately $18.9 million
(including proceeds of approximately $10.2 million during 1995), and on loans
and advances from the Strategic Partners.
Through March 31, 1996, Faulding advanced to the Company a total of $1.1
million which was subsequently converted into a note in aggregate principal
amount of $1.2 million, maturing in 1997. Similarly, prior to August 1994,
IVAX had loaned various amounts to the Company. All such loans
28
<PAGE>
from IVAX have been repaid. The Strategic Partners have made equity
investments in the Company totaling $5.2 million, and Faulding has purchased
warrants (the "Faulding Warrants") to purchase 400,000 shares of Nonvoting
Common Stock of the Company with an aggregate exercise price totaling $2.0
million. The Strategic Partners have spent and continue to spend substantial
amounts for the clinical development and regulatory approval of NBT
Paclitaxel. All other payments from the Strategic Partners have been and will
continue to be for shipments of NBT Paclitaxel. Should either of the
arrangements with the Strategic Partners be terminated, the Company will be
required to either replace such arrangements with new arrangements or assume
development of NBT Paclitaxel. Either of these events would result in delays
in commercialization, may require substantial additional financing and would
likely have a material adverse effect on the Company's business, financial
condition and results of operations. See "Risk Factors--Dependence on
Strategic Alliances."
Inventories increased $0.2 million to 1.4 million at March 31, 1996 from
$1.2 million at December 31, 1995. Inventories decreased $0.2 million to $1.2
million at December 31, 1995 from $1.4 million for the year ended December 31,
1994. The amount of product held as finished goods equivalents in work-in-
progress inventories as well as finished goods inventories is dependent on a
number of factors, including the shipping requirements of the Strategic
Partners and the Company's production planning for meeting those needs.
Inventory balances may vary significantly during product development and
launch periods. The Company plans to make significant biomass investments
during 1996.
The Company expended $0.1 million for capital projects during the
first quarter of 1996. The Company expended $1.2 million and $0.6 million,
respectively, during 1995 and 1994, for capital projects. These expenditures
were primarily made to build the Canadian small-scale manufacturing facility
and for expansion and improvements to the Boulder, Colorado laboratories and
facilities. In 1996, the Company expects to invest $3.0 million to $4.0
million from the proceeds of the Offering in property, plant and equipment,
primarily to expand the plantations and upgrade its current domestic and
foreign manufacturing capabilities, as well as to begin construction of a new
large-scale commercial EIP(TM) manufacturing facility.
The Company anticipates that its existing capital resources, including
preclinical and clinical support from the Strategic Partners and cash
generated from operations, together with the net proceeds of the Offering and
interest earned thereon, will be adequate to fund operations and capital
expenditures through the first quarter of 1998. If the Company is not
generating sufficient operating revenues from the sale of NBT Paclitaxel by
the end of the first quarter of fiscal 1998, of which there can be no
assurance, the Company will be required to raise additional capital. The
Company's actual future capital needs will also depend upon numerous factors,
including the costs and progress of its process and technology development
activities, the cost and success of the Company's plantation strategy, the
progress of the Strategic Partners' clinical development of NBT Paclitaxel,
the timing and receipt of regulatory approvals, the costs involved in
preparing, filing, prosecuting, maintaining, enforcing and defending patent
claims and other intellectual property rights, developments related to
regulatory and reimbursement matters, competing technological and market
developments, changes in or terminations of existing strategic alliances and
the cost, timing and success of manufacturing scale-up, including construction
of a large-scale commercial EIP(TM) manufacturing facility. There can be no
assurance, however, that the Company, if required, will be able to raise
additional financing on acceptable terms, or at all. See "Risk Factors--Future
Capital Needs; Uncertainty of Additional Funding."
NET OPERATING LOSS CARRYFORWARDS
As of March 31, 1996, the Company had net operating loss carryforwards for
income tax purposes of approximately $17.0 million to offset future taxable
income. Under Section 382 of the Internal Revenue Code of 1986, as amended,
the utilization of net operating loss carryforwards is limited after
29
<PAGE>
an ownership change, as defined in such Section 382, to an annual amount equal
to the value of the loss corporation's outstanding stock immediately before
the date of the ownership change multiplied by the federal long-term tax-
exempt rate in effect during the month the ownership change occurred. Such an
ownership change occurred in September 1993. As a result, the Company will be
subject to an annual limitation on the use of its net operating losses. This
limitation only affects net operating losses incurred up to the ownership
change and does not reduce the total amount of net operating loss which may be
taken, but rather limits the amount which may be used during a particular
year. Therefore, in the event the Company achieves profitability, such
limitation would have the effect of increasing the Company's tax liability and
reducing the net income and available cash resources of the Company if the
taxable income during a year exceeded the allowable loss carried forward to
that year.
30
<PAGE>
BUSINESS
GENERAL
The Company is a natural product pharmaceutical company which is focusing
primarily on the development, manufacture and commercialization of paclitaxel,
a naturally-occurring anti-cancer agent found in certain species of yew
(Taxus) trees. The Company's paclitaxel is referred to herein as "NBT
Paclitaxel."
The market for paclitaxel is dominated by Bristol-Myers Squibb Company
("BMS"). BMS has publicly announced that worldwide sales of their formulation
of paclitaxel were approximately $580 million in 1995 and $200 million in the
first quarter of 1996. BMS's paclitaxel is the only United States Food and
Drug Administration ("FDA") approved formulation of paclitaxel, which approval
is for the treatment of refractory (non-responsive) breast and ovarian
cancers. The Company believes that by combining its proprietary extraction,
isolation and purification ("EIP(TM)") manufacturing technology and the
renewable sources of Taxus biomass being developed by the Company with its
long-term, exclusive clinical development, regulatory approval, marketing and
distribution agreements with two major international pharmaceutical companies,
the Company will be well-positioned to participate in the worldwide paclitaxel
market. There can be no assurance, however, that NBT Paclitaxel will prove
safe and effective, meet applicable standards necessary for regulatory
approvals, or be successfully marketed. See "Risk Factors--Early Stage of
Product Development; Dependence on Paclitaxel," and "Risk Factors--Dependence
on Strategic Alliances."
To advance the development and commercialization of NBT Paclitaxel, the
Company has entered into 20-year, exclusive agreements with each of F.H.
Faulding & Co., Ltd. ("Faulding") and Baker Norton Pharmaceuticals, a
subsidiary of IVAX Corporation ("IVAX" and together with Faulding, the
"Strategic Partners") for the clinical development, sales, marketing and
distribution of NBT Paclitaxel. Faulding, Australia's largest domestic
pharmaceutical company, had 1995 sales of approximately $1.3 billion, and
IVAX, a diversified international healthcare company, also had 1995 sales of
approximately $1.3 billion.
The Strategic Partners have agreed to fund and undertake the clinical trials
required in order to obtain regulatory approvals for the commercialization of
NBT Paclitaxel in their respective territories. The Company is responsible for
supplying the Strategic Partners with NBT Paclitaxel for all of their clinical
and commercial requirements. Under the terms of each agreement, IVAX and
Faulding pay a fixed price for NBT Paclitaxel for non-commercial sales. For
NBT Paclitaxel sold commercially, Faulding pays the Company a substantial
share of gross revenues. For IVAX's commercial sales, IVAX will pay the
Company on a cost plus basis for the Company's manufacture of NBT Paclitaxel
and in addition will pay the Company a substantial share of IVAX's NBT
Paclitaxel profits (as determined pursuant to the IVAX Agreement).
Faulding obtained regulatory approval and began marketing NBT Paclitaxel as
a generic pharmaceutical in Australia in January 1995 for the treatment of
refractory breast and ovarian cancers and is seeking approval to sell NBT
Paclitaxel in other countries in its defined territory. IVAX filed an
investigational new drug exemption ("IND") application for NBT Paclitaxel with
the FDA in June 1994. IVAX is currently engaged in Phase II/III clinical
trials with NBT Paclitaxel for treating refractory breast and ovarian cancers
and believes it may be able to submit a new drug application ("NDA") to the
FDA for at least one indication in 1997. There can be no assurance, however,
as to the completion of any clinical trials or as to whether IVAX will meet
anticipated timetables or be successful in obtaining any necessary regulatory
approvals or successfully market NBT Paclitaxel even if approval has been
obtained. See "Risk Factors--Government Regulation; No Assurance of Regulatory
Approval" and "Risk Factors--Uncertain Efficacy of Paclitaxel; Adverse Side
Effects Associated with Use of Paclitaxel."
The Company's EIP(TM) technology is designed to allow the extraction,
isolation and purification of paclitaxel and other taxanes (compounds
structurally similar to paclitaxel that can be synthesized into
31
<PAGE>
paclitaxel) from renewable sources of biomass such as needles and limbstock
harvested from ornamental yew bushes. In order to have access to a more stable
and reliable source of Taxus biomass for use in the production of NBT
Paclitaxel, the Company has entered into agreements with Pacific
Biotechnologies, Inc. ("PBI"), a subsidiary of Pacific Regeneration
Technologies, Inc., one of Canada's largest reforestation companies (the "PBI
Agreement"), and Zelenka Nursery, Inc. ("Zelenka"), one of the largest
horticulture companies in the United States (the "Zelenka Agreement"), each to
grow cloned ornamental yew bushes on a large scale. The Company intends to
supplement its supply of biomass obtained from PBI and Zelenka by entering
into additional agreements with commercial growers of ornamental yew bushes
and, if economical, to develop its own plantations. The Company is currently
constructing a large-scale commercial EIP(TM) manufacturing facility with
planned capacity to meet the forecasted commercial needs of the Strategic
Partners through 1999. In addition, in order to increase production yields of
NBT Paclitaxel, and lower its cost of manufacture, the Company is developing a
semi-synthetic process for manufacturing NBT Paclitaxel from certain other
taxanes contained in renewable biomass sources.
PACLITAXEL OVERVIEW
Cancer is the second leading cause of death in the United States with over
one million new cases diagnosed each year. Cancer is generally treated by
surgery, radiation or chemotherapy or a combination of these therapies.
Paclitaxel, approved less than four years ago, has become the largest selling
of a class of cancer chemotherapy drugs known as cytotoxic agents.
Paclitaxel is a natural product that was recognized by the National Cancer
Institute (the "NCI") in 1963 as showing cytotoxic activity against leukemia
cells and inhibitory activity against a variety of tumors. Over the next two
decades, researchers working under grants from the NCI conducted studies to
determine paclitaxel's structure and its mechanism of action. The NCI studies
indicated that paclitaxel inhibits the normal action of microtubules in cancer
cell division. Microtubules, located in the cytoplasm of cells, play a vital
role in cellular division. Paclitaxel promotes microtubule assembly and blocks
normal microtubule disassembly in cells, thereby inhibiting cell division and
inducing death of cancer cells. This cytoplasmic mechanism of action contrasts
with the nuclear mechanism of action of the majority of cytotoxic drugs which
kill the cell by attacking nuclear components such as DNA or RNA.
In June 1991, the NCI formalized a Collaborative Research and Development
Agreement for development of paclitaxel with BMS, the world's largest oncology
company. BMS assumed development of paclitaxel which included completion of
the necessary clinical trials and manufacturing scale-up. In June 1992, BMS
submitted an NDA to the FDA. BMS received approval for the sale of paclitaxel
as a treatment for refractory ovarian cancer in December 1992 and approval for
the sale of paclitaxel as a treatment for refractory breast cancer in April
1994. BMS has publicly announced that their formulation of paclitaxel has
achieved world-wide commercial sales of approximately $580 million in 1995 and
$200 million in the first quarter of 1996.
Paclitaxel is one of a family of compounds, commonly referred to as taxanes,
which share a hydrocarbon ring (diterpene) structure. Taxanes are found
naturally in many parts of various species of yew trees and bushes. The
concentration of taxanes in yew trees and bushes is very small-- generally
less than 500 parts per million each--and accordingly, the process of
extracting taxanes from yew biomass is complicated and challenging. To arrive
at a final stage paclitaxel product for use in clinical trials and for
commercialization, several production approaches can be utilized. The Company
believes the two most prevalent processes used today are conventional
extraction and semi-synthesis.
In extraction, the manufacturing process must be designed to extract,
isolate and purify paclitaxel from yew biomass leaving behind other
components, including non-paclitaxel taxanes. The extraction, isolation and
purification processes, however, are complicated since there are over 100
different
32
<PAGE>
taxanes present in yew biomass. In a semi-synthesis process, the initial
extraction, isolation and purification is similar to that of the conventional
extraction process, except that the process not only isolates paclitaxel, but
also isolates and subsequently converts through chemical synthesis certain
other taxanes (which are otherwise considered waste byproducts) into
paclitaxel, thereby increasing the yield of paclitaxel from the same biomass
source. The final product of either method must have levels of impurity at or
below acceptable regulatory standards.
Historically, the wild Pacific yew tree has been the primary source of yew
biomass. Most species of Taxus, including the wild Pacific yew, grow slowly,
requiring a number of years to reach harvestable size. As a result of its slow
growing pattern, wild Taxus is generally found in old growth forests,
frequently the habitat of endangered species, including the spotted owl.
Biomass from the wild Pacific yew tree has historically been obtained from the
bark, which generally requires destroying the tree. As a result, there has
been a considerable amount of public debate and controversy in the United
States and other countries by environmental groups and others regarding the
harvesting of bark from the wild Pacific yew tree. The Company halted
harvesting bark from wild Pacific yew trees in 1994. See "--
Corporate Strategy" and "--Biomass; Manufacturing."
Other companies have developed taxane analogues which are similar, but not
chemically identical, to paclitaxel. For example, RPR, a large international
pharmaceutical company, has developed docetaxel, one such taxane analog, which
is being marketed in various parts of the world under the trademark
Taxotere(R). Taxotere(R) has a different toxicity profile from paclitaxel and
has side effects not observed with paclitaxel. In May 1996, the FDA approved
Taxotere(R) for treatment of anthracycline-resistant breast cancer in patients
without impaired liver function.
CORPORATE STRATEGY
The Company's objective is to be an efficient, low cost manufacturer of high
quality paclitaxel. The Company's strategy for achieving its objective
includes the following:
Develop and Commercialize Paclitaxel Through Strategic Alliances. In order
to promote the more rapid development and commercialization of NBT Paclitaxel,
the Company has entered into long-term exclusive agreements with Faulding and
IVAX. Pursuant to these agreements, Faulding and IVAX are responsible for
obtaining regulatory approvals, including designing and conducting clinical
trials, as well as marketing NBT Paclitaxel in their respective territories,
if any such approvals are received. The Strategic Partners are required to
purchase all of their paclitaxel requirements from the Company. See "Risk
Factors--Dependence on Strategic Alliances" and "--Strategic Alliances."
Expand and Secure Renewable Biomass Supply Sources. In order to avoid the
environmental issues surrounding the harvesting of wild Pacific yew biomass
and to expand and secure a renewable biomass supply source, the Company
implemented a plantation strategy by entering into the PBI Agreement and
Zelenka Agreement to grow cloned ornamental yew bushes. The Company expects to
supplement its biomass obtained from PBI and Zelenka by entering into
additional agreements to purchase biomass and mature yew bushes from
commercial growers and, if economical, to develop its own plantations. Using
its EIP(TM) technology, the Company plans to extract paclitaxel and other
taxanes from renewable biomass components such as needles and limbstock of
bushes grown on the PBI and Zelenka plantations. See "Risk Factors--Potential
Limitations on the Availability of Raw Materials" and "--Biomass;
Manufacturing."
Scale-Up Manufacturing Process. In order to meet the currently anticipated
supply needs of the Strategic Partners through 1999, the Company has commenced
construction of a large-scale commercial EIP(TM) manufacturing facility in
Boulder, Colorado. The Company intends to augment its current manufacturing
process with semi-synthesis production in 1999 either through the addition of
semi-synthesis manufacturing capacity to its current EIP(TM) facility under
construction or the
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construction of a new semi-synthesis facility, subject to receipt of
applicable regulatory approvals. See "Risk Factors--Limited Manufacturing
Experience; Dependence on a Commercial-Scale Paclitaxel Manufacturing
Facility; Technological Challenges" and "--Biomass; Manufacturing."
CLINICAL STATUS OF NBT PACLITAXEL
Pursuant to the agreements with the Strategic Partners, the Strategic
Partners have primary responsibility for designing and conducting clinical
trials and for pursuing regulatory approval of NBT Paclitaxel throughout the
world. The Company has primary responsibility for carrying out the procedures
for regulatory approval relating to the Company's manufacturing processes. The
Company has filed confidential DMFs containing certain of the Company's
proprietary manufacturing processes relating to the manufacture of NBT
Paclitaxel with regulatory agencies in the United States, Australia, Canada,
Europe and Singapore. In addition, the Company performed the toxicological and
preclinical characterization necessary for an IND for extracted paclitaxel.
Existing regulatory approvals and statutes have a direct impact on the
clinical and marketing strategy being pursued by the Company and its Strategic
Partners. In December 1992, BMS obtained NDA approval in the United States for
its paclitaxel compound. Under the Waxman-Hatch Act, a non-patented drug such
as paclitaxel which first gains approval through an NDA process is granted a
five year period of marketing exclusivity which prevents submission by another
party of an Abbreviated New Drug Application ("ANDA") for generic substitutes
until such period of exclusivity expires. The exclusivity period in the United
States expires in December 1997. The FDA will accept and review, however, an
NDA submitted by another party during this period of exclusivity. A comparable
statute to the Waxman-Hatch Act exists in Europe, although the related period
of exclusivity is ten years. For these reasons, IVAX plans to file an NDA for
NBT Paclitaxel. See "--Government Regulation and Product Approvals."
IVAX. IVAX is currently pursuing a strategy to obtain NDA approval of NBT
Paclitaxel in the United States for the treatment of refractory breast and
ovarian cancers. IVAX filed an IND with the FDA in June 1994. In October 1994,
IVAX initiated its Phase I clinical trials of NBT Paclitaxel in the United
States and in May 1995 initiated Phase II/III clinical trials. IVAX is
currently conducting Phase II/III studies using NBT Paclitaxel in three
indications, including refractory breast and ovarian cancers. The breast
cancer trial is evaluating both a short-term and a long-term dosing schedule.
IVAX has informed the Company that it expects to finish patient accrual for
the breast cancer trial in early 1997. Patient accrual for the ovarian cancer
trial has been completed. The clinical trial for the third indication is
ongoing. IVAX has publicly disclosed that it may be able to submit an NDA for
NBT Paclitaxel for at least one indication during 1997. There can be no
assurance that clinical trials will proceed or be completed as indicated, that
NBT Paclitaxel will prove safe and effective, meet applicable regulatory
standards or be successfully marketed. See "Risk Factors--Government
Regulation; No Assurance of Regulatory Approval."
Faulding. In January 1995, Faulding received regulatory approval from the
TGA to market ANZATAX(TM) (Faulding's brand name for NBT Paclitaxel) in
Australia for the treatment of refractory breast and ovarian cancers. Under
Australian law there is no exclusivity period comparable to that provided by
the Waxman-Hatch Act, and, therefore, approval of a generic substitute was
possible without the need for additional clinical trials. Faulding did,
however, conduct clinical investigations with ANZATAX(TM) in order to support
marketing in Australia and to support applications for regulatory approval in
other countries. The Company and Faulding have obtained regulatory approval
from the TGA for the Company to supply NBT Paclitaxel to Faulding from either
its Canadian or United States manufacturing facilities. Faulding is also
engaged in ongoing clinical research with NBT Paclitaxel with the goal of
improving the effectiveness of combination therapies utilizing NBT Paclitaxel
and expanding the number of disease indications treatable with NBT Paclitaxel.
Faulding
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has filed certificates of free sale and requested marketing approval in
various territories including Hong Kong, Cyprus, Egypt, Oman, Turkey, Kuwait,
Saudi Arabia, Malaysia, Thailand, Indonesia and the Philippines. There can be
no assurance, however, that Faulding will receive approval in any of these
territories or will successfully market NBT Paclitaxel, even if such approvals
are received.
The Company plans to submit a DMF in support of an SNDA for NBT Paclitaxel
manufactured through a semi-synthesis process. An SNDA cannot be filed until
such time, if ever, as an NDA is approved for NBT Paclitaxel. Based on the
SNDA approval process for BMS, the Company believes additional toxicological
and stability data may be required prior to submission of an SNDA for
manufacturing NBT Paclitaxel through a semi-synthesis process. Toxicology data
may also be required to support production using non-bark sources of
paclitaxel as well as different species of Taxus plants other than those in
the original NDA filing. It is not anticipated that an SNDA could be filed
before 1999, since an approved NDA will need to exist before an SNDA can be
submitted. The requirements for an SNDA have not been discussed with the FDA
and, therefore, are uncertain. As such, there can be no assurance that the
semi-synthetic process being developed by the Company will receive regulatory
approval. See "Risk Factors--Government Regulation; No Assurance of Regulatory
Approval" and "-- Government Regulation and Product Approvals."
BIOMASS; MANUFACTURING
Biomass. Paclitaxel and other taxanes necessary for the production of NBT
Paclitaxel are present in many parts of various species of yew trees and
bushes. Historically, the Company used the bark of the wild Pacific yew tree
as a source of biomass from which to manufacture NBT Paclitaxel. The Company's
EIP(TM) technology is designed to allow extraction and purification of
paclitaxel and other taxanes, which can be synthesized into paclitaxel, from
renewable sources of biomass such as needles and limbstock harvested from
ornamental yew trees and bushes. The Company ceased harvesting bark from the
wild Pacific yew tree in 1994.
In order to have access to a more stable supply of biomass for use in the
production of NBT Paclitaxel, the Company entered into the PBI Agreement in
1993 and the Zelenka Agreement in 1996 and intends to enter into additional
agreements to purchase biomass and mature yew bushes from commercial growers
and, if economical, to develop its own plantations. The Company believes that
the plantations being developed under these agreements will produce adequate
biomass to support the commercial requirements of the Strategic Partners for
the foreseeable future. By planting and propagating a reliable and renewable
homogeneous biomass source, the Company believes that it may be able to reduce
its raw material costs, currently the Company's largest cost component in
producing NBT Paclitaxel, while at the same time allowing it to increase the
yield of NBT Paclitaxel. The Company made its first small-scale harvest
pursuant to the PBI Agreement in the first quarter of 1996 and pursuant to the
Zelenka Agreement in the second quarter of 1996. The Company is also examining
other potential sources of biomass in the event demand exceeds current
expectations. There can be no assurance that the use of the ornamental yew
bushes and the use of non-bark sources of such bushes will be approved by the
FDA for use in manufacturing NBT Paclitaxel or that current sources of biomass
will be sufficient to meet the Company's needs. See "Risk Factors--Potential
Limitation on the Availability of Raw Materials" and "Risk Factors--Government
Regulation; No Assurance of Regulatory Approval."
Manufacturing. Crude paclitaxel is extracted from yew bushes by third party
extractors and delivered to the Company's manufacturing facilities in Boulder,
Colorado and British Columbia, Canada. At these two facilities, the impure
paclitaxel undergoes an isolation and purification process and the resulting
active drug substance is delivered to Faulding's final fill and finish
facility in Australia where NBT Paclitaxel is formulated by Faulding for final
packaging for both itself and IVAX. Each of the Company's small-scale
manufacturing facilities has been inspected by the TGA and approved for the
commercial production of NBT Paclitaxel for sale in Australia. TGA approval
applies
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to the manufacture of paclitaxel from both the bark of the wild Pacific yew
tree as well as from other raw material sources. On a combined basis, the
Company believes these facilities have adequate capacity to meet clinical and
commercial demand through the launch of commercial sales of NBT Paclitaxel in
the United States, if NBT Paclitaxel receives regulatory approval. The Company
plans to seek initial FDA approval of its manufacturing processes, which
utilize both bark sources of biomass as well as non-bark sources of biomass
obtained from the needles and limbstock of ornamental yew trees and bushes in
the production of NBT Paclitaxel. There can be no assurance that such
regulatory approval will be obtained. See "Risk Factors--Government
Regulation; No Assurance of Regulatory Approval."
The Company is currently refining and scaling-up its EIP(TM) technology for
use in a large-scale commercial manufacturing facility, which is being built
in Boulder. The Company currently expects to complete construction and
validation of this facility in 1997. The Company believes that this facility
will have adequate capacity to meet the forecasted demands of the Strategic
Partners through 1999, when it intends, subject to receipt of regulatory
approvals, to establish a semi-synthesis manufacturing facility. Upon
completion of validation, but prior to approval of the NDA for NBT Paclitaxel,
the Company anticipates the large-scale commercial facility and processes
intended to be used for commercial launch of NBT Paclitaxel in the United
States will be inspected by the FDA. Approval of the facility will be a
component of the FDA's approval of the NDA. There can be no assurance that the
Company will succeed in adopting its EIP(TM) technology for large-scale
commercial manufacturing, that the facility will be completed or validated
within the time periods indicated, that such facility and manufacturing
processes will receive necessary regulatory approvals or, even if approved,
will be capable of producing NBT Paclitaxel in the quantities necessary to
satisfy the requirements of the Strategic Partners. See "Risk Factors--Limited
Manufacturing Experience; Dependence on a Commercial-Scale Paclitaxel
Manufacturing Facility; Technological Challenges."
The Company currently contracts with a third party for small-scale
paclitaxel extraction. In order for the Company to meet the expected increase
in demand for NBT Paclitaxel once commercialized, the Company must either
contract out its large-scale extraction requirements or build a large-scale
commercial extraction facility. There can be no assurance that a third party
contract for such large-scale extraction can be obtained on commercially
reasonable terms or that a large-scale extraction facility can be constructed
in a timely fashion and receive the necessary regulatory approvals. The
failure of the Company to secure a large-scale commercial extraction contract
or to construct a regulatory-approved large-scale commercial extraction
facility on a timely basis would have a material adverse effect on the
Company. See "Risk Factors--Limited Manufacturing Experience; Dependence on a
Commercial-Scale Paclitaxel Manufacturing Facility; Technological Challenges."
In order to increase its manufacturing capacity, the Company is also
developing, and has applied for patent protection for, a semi-synthesis
process for manufacturing NBT Paclitaxel from certain other taxanes contained
in renewable biomass sources. Semi-synthesis manufacturing initially involves
extraction of paclitaxel and other taxanes from yew sources. Unlike
extraction, however, which attempts to isolate and purify only paclitaxel,
semi-synthesis isolates and purifies certain additional taxanes. Through a
chemical synthesis process, these other taxanes are converted into paclitaxel.
Accordingly, since both paclitaxel and other taxanes are used in semi-
synthesis, the Company expects to be able to increase the paclitaxel yield
from its biomass sources using a semi-synthesis process. The use of semi-
synthesis will require receipt of additional regulatory approvals, of which
there can be no assurance. See "Risk Factors--Limited Manufacturing
Experience; Dependence on a Commercial-Scale Paclitaxel Manufacturing
Facility; Technological Challenges" and "Risk Factors--Government Regulation;
No Assurance of Regulatory Approval."
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STRATEGIC ALLIANCES
The Company has formed strategic alliances through long-term exclusive
agreements with each of Faulding and IVAX. Pursuant to such arrangements, each
Strategic Partner has agreed to fund and, with the Company's input, undertake
the clinical trials required to obtain regulatory approvals for
commercializing NBT Paclitaxel in their respective territories. The Company is
responsible for supplying the Strategic Partners with NBT Paclitaxel for
clinical trials and commercial purposes and each Strategic Partner is required
to purchase all of its paclitaxel requirements from the Company. Under the
terms of each agreement, IVAX and Faulding pay a fixed price for NBT
Paclitaxel for non-commercial sales. For NBT Paclitaxel sold commercially,
Faulding pays the Company a substantial share of gross revenue. For IVAX's
commercial sales, IVAX will pay the Company on a cost plus basis for the
Company's manufacture of NBT Paclitaxel and in addition will pay the Company a
substantial share of IVAX's NBT Paclitaxel profit (as determined in accordance
with the IVAX Agreement). The Company believes that through its agreements
with Faulding and IVAX, it will be able to take advantage of their resources,
including expertise in clinical testing and sales, marketing and distribution.
As a result of these strategic alliances, the Company believes it may be able
to compete more effectively with BMS, RPR, generic drug manufacturers and
other companies, research organizations and academic institutions that are
developing paclitaxel and are attempting to develop new and advanced forms of
anti-cancer drugs. There can be no assurance, however, that the agreements
with the Strategic Partners will not be terminated prior to their expiration,
that the Strategic Partners will succeed in obtaining regulatory approvals for
NBT Paclitaxel in the United States or elsewhere or that they will succeed in
marketing NBT Paclitaxel. See "Risk Factors--Dependence on Strategic
Alliances."
Faulding. Faulding, Australia's largest domestic pharmaceutical company with
1995 sales of approximately $1.3 billion, actively markets anti-cancer
pharmaceuticals and other health care products in Australia, Southeast Asia
and other countries throughout the world. In 1992, the Company originally
entered into a development and marketing agreement (the "Faulding Agreement")
with Faulding. The Faulding Agreement, as amended and restated, has an initial
term of 20 years and will continue thereafter from year to year unless
terminated in writing by either party.
The Faulding Agreement grants Faulding the exclusive right to develop and
market NBT Paclitaxel in ten countries, including Australia, New Zealand and
much of Southeast Asia (the "Faulding Territory"). The Faulding Agreement also
grants Faulding the non-exclusive right to sell NBT Paclitaxel in certain
countries in the Middle East. Pursuant to the Faulding Agreement, Faulding is
required to purchase all of its requirements of paclitaxel from the Company,
except in certain circumstances where the Company is unable to supply
Faulding's requirements.
In a March 1995 amendment to the Faulding Agreement, Faulding agreed to
convert certain prepaid product sales and deferred revenue aggregating $1.1
million, which would have become due in 1995 and 1996, into a note in the
aggregate principal amount of $1.2 million, which matures in 1997. The terms
of the note provide that the Company will pay interest quarterly on amounts
which would have been payable to Faulding had the conversion not occurred, at
an annual rate of 9%.
Faulding may terminate the Faulding Agreement: (i) upon the reorganization
or insolvency of the Company; (ii) if Faulding becomes controlled by a
pharmaceutical company that sells paclitaxel in the Faulding territory; (iii)
if the Company becomes controlled by IVAX or BMS; (iv) if the Company is
purchased by a pharmaceutical company which sells paclitaxel in the Faulding
territory and that company refuses to be bound by the terms of the Faulding
Agreement; or (v) if the Company is unable to meet the paclitaxel supply
requirements of Faulding. The Company may terminate the Faulding Agreement:
(i) upon the reorganization or insolvency of Faulding; or (ii) in certain
circumstances, upon a change in control of Faulding.
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The Company is required to indemnify Faulding pursuant to the Faulding
Agreement for any defect in the NBT Paclitaxel that is shipped to Faulding and
for uncured breaches of the Company's warranties or obligations under the
Faulding Agreement. Faulding is required to indemnify the Company against all
losses (i) resulting from a defect in a product containing NBT Paclitaxel
manufactured by Faulding except where such defect is the fault of the Company,
(ii) resulting from a product containing NBT Paclitaxel formulated, stored,
handled, promoted, distributed, registered or sold by Faulding and (iii) for
uncured breaches of Faulding's representations and warranties under the
Faulding Agreement.
In connection with the IPO, Faulding purchased 400,000 shares of the
Company's Nonvoting Common Stock and 400,000 warrants to purchase Nonvoting
Common Stock. See "Description of Capital Stock--Nonvoting Common Stock;
Warrants to Purchase Nonvoting Common Stock."
IVAX. IVAX, a diversified international health care company with 1995 sales
of approximately $1.3 billion, is engaged in the research, development,
manufacture and sale of branded and generic pharmaceuticals and other related
health care and personal products and specialty chemicals. In 1993, the
Company entered into a development and marketing agreement (the "IVAX
Agreement") with IVAX (through IVAX's subsidiary, Baker Norton
Pharmaceuticals, "BNP"). The IVAX Agreement has an initial term of 20 years
and will continue thereafter from year to year unless terminated in writing by
either party.
The IVAX Agreement grants IVAX the exclusive right to develop and market NBT
Paclitaxel in the United States and in every country outside the Faulding
Territory except for the Vatican City, China, the former Soviet Union and the
Middle East where such right is non-exclusive. Pursuant to the IVAX Agreement,
IVAX is required to purchase all of its requirements of paclitaxel from the
Company except in certain circumstances where the Company is unable to supply
IVAX's requirements.
Either IVAX or the Company may terminate the IVAX Agreement if the other
party materially breaches the agreement under certain circumstances. In
addition, IVAX may terminate the IVAX Agreement if the Company fails to meet
the paclitaxel supply requirements of IVAX for a continuing three year period.
Under certain circumstances, IVAX may obtain certain manufacturing information
from the Company and have NBT Paclitaxel manufactured by third parties.
The Company is required to indemnify IVAX pursuant to the IVAX Agreement for
any defect in the NBT Paclitaxel that is shipped to IVAX, for certain claims
of patent or trade secret infringement relating to the manufacture,
composition, or sale of NBT Paclitaxel supplied to IVAX and for uncured
breaches of certain of the Company's representations and warranties under the
IVAX Agreement. IVAX is required to indemnify the Company against all losses
(i) resulting from a defect in a product containing NBT Paclitaxel
manufactured by IVAX, (ii) resulting from a product containing NBT Paclitaxel
formulated, stored, handled, promoted, distributed, registered or sold by
IVAX, to the extent the defect is caused by IVAX, and (iii) for uncured
breaches of IVAX's representations and warranties under the IVAX agreement.
IVAX, through its subsidiary D&N Holding Company ("D&N"), currently owns
1,126,398 shares of the Common Stock. See "Risk Factors--Dependence on
Strategic Alliances" and "Principal Stockholders."
MARKETING AND SALES
Marketing and sales of NBT Paclitaxel will be conducted by the Strategic
Partners. The Company believes each of the Strategic Partners has established
sales forces with demonstrated sales capability to effectively market
pharmaceutical products. The Company has no sales force and has only limited
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marketing capabilities and has no present intention to establish a sales or
marketing force. The Company expects that sales to the Strategic Partners will
account for substantially all of the Company's revenues for the foreseeable
future. As a result, the loss of either Strategic Partner as a customer, in
the absence of a comparable alternative strategic alliance arrangement, would
have a material adverse effect on the Company. See "Risk Factors--Dependence
on Strategic Alliances," "Risk Factors--Reliance on Foreign Sales" and "--
Strategic Alliances."
COMPETITION
The biopharmaceutical industry is an expanding and rapidly changing industry
characterized by intense competition for financing, executive talent,
intellectual property and product sales. The Company competes with all
entities developing and producing therapeutic agents for cancer treatment or
other diseases which may be the subject of future product development efforts
of the Company. The success of competitors in entering the market for
paclitaxel may reduce the Company's potential market share and reduce the
price of NBT Paclitaxel, each of which could have a material adverse effect on
the Company. In addition, regulatory approval and marketing are being handled
exclusively by the Strategic Partners. Although the Company believes the
Strategic Partners have capable clinical and marketing abilities, there can be
no assurance that the Strategic Partners will be capable or effective in
gaining regulatory approval on a timely basis, if at all, or competing on a
global basis with existing or new competitors. See "Risk Factors--Dependence
on Strategic Alliances."
BMS, the world's largest oncology company with 1995 sales of paclitaxel of
approximately $580 million, is already marketing paclitaxel commercially in
the United States, Australia, Canada, Europe and certain other territories. In
addition, RPR has developed a proprietary analog of paclitaxel, docetaxel,
which is marketed under the trademark Taxotere(R). Taxotere(R) has a
microtubule binding mechanism of action similar to that of paclitaxel.
Taxotere(R) is approved in the United States, European Community, Australia,
Canada and a number of other countries. Taxotere(R) is approved in the United
States for treatment of anthracycline-resistant breast cancer in patients
without impaired liver function. Treatment with Taxotere(R), however, can
cause certain side effects not observed with paclitaxel. It is anticipated,
however, that Taxotere(R) will compete with paclitaxel, potentially eroding
paclitaxel sales.
Furthermore, upon expiration in December 1997 of the five-year marketing
protection from generic competition currently provided to BMS's formulation of
paclitaxel by the Waxman-Hatch Act, the Company will be subject to competition
from generic paclitaxel manufacturers. In Europe, a similar exclusivity period
will end 10 years after BMS' initial approval. The Company is aware that Mylan
Pharmaceuticals, Inc. has entered into an exclusive licensing agreement with
Phytogen International LLC to develop, manufacture and market generic
paclitaxel in the United States, Canada and Mexico. Finally, academic and
research organizations and pharmaceutical and biotechnology companies are
pursuing, among other things, genetically engineered drugs, chemical synthesis
and cell-tissue culture which may compete with the Company's products or
technology. In addition, certain companies are pursuing the production of
paclitaxel and other taxanes from natural product extraction techniques.
Many of the Company's competitors, most notably BMS and RPR, have
substantially greater capital resources, research and development
capabilities, manufacturing and marketing resources, and experience than the
Company. The Company expects BMS to compete intensely to maintain its
dominance of the paclitaxel market, including through pursuit of an aggressive
patent strategy. The Company's competitors may succeed in developing products
that are more effective or less costly than any that may be developed by the
Company, or that gain regulatory approval prior to the Company's products.
Many companies and research institutions are also seeking means to obtain
paclitaxel and taxanes from non-bark renewable biomass components of yew trees
and other sources in order to increase paclitaxel yields, avoid environmental
concerns and reduce the cost of biomass. In addition, the Company is aware of
several potential competitors that have developed and patented or are
developing various processes for producing paclitaxel and paclitaxel-related
substances semi-synthetically, which resulted or may result in products that
are equally as effective as paclitaxel extracted from bark. Although the
Company believes the production of fully-synthetic paclitaxel is not
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currently commercially viable, the discovery by a third party of a cost-
effective means to fully synthesize paclitaxel in commercial quantities or the
manufacture of taxane derivatives or analogs that are more efficacious than
paclitaxel in treating cancer could have a material adverse effect on the
Company. See "Risk Factors--Rapid Technological Change; Intense Competition"
and "Risk Factors--Government Regulation; No Assurance of Regulatory
Approval."
PATENTS AND PROPRIETARY TECHNOLOGY
The Company's success depends, in part, on its ability to obtain patents,
maintain trade secret protection and operate without infringing on the
proprietary rights of third parties. Where appropriate, the Company seeks
protection of its proprietary technology by applying for patents in the United
States and abroad. The Company owns three issued United States patents and has
several United States patent applications pending. The Company has filed
patent applications in certain other areas of the world and expects to make
additional filings as it believes appropriate. In addition, the Company has
obtained licenses from third parties to use their proprietary technology, for
which patent applications have been filed in the United States and in certain
other areas of the world. There can be no assurance that either the Company's
or its licensors' existing patent applications will become issued patents or
that, if issued, the coverage claimed in the applications will not be
significantly reduced prior to issuance or, that the Company will be able to
obtain any necessary or desired additional licenses to patents or technologies
of others or that the Company will be able to develop its own additional
patentable technologies. In addition, there can be no assurance that any
future patents issued to the Company, if any, will provide it with competitive
advantages or that products or processes covered by such patents will not be
challenged as infringing upon the patents or proprietary rights of others or
that any such patents will not be invalidated, or that the patents or
proprietary rights of others will not have a material adverse effect on the
ability of the Company to do business. Patent applications in the United
States are maintained in secrecy until patents are issued and patent
applications in certain other countries generally are not published until more
than 18 months after they are filed. In addition, publication of scientific or
patent literature often lags behind actual discoveries. As a result, the
Company cannot be certain it or any of its licensors was the first creator of
inventions covered by the Company's or its licensors' pending patent
applications or that the Company or its licensors were the first to file such
applications. Furthermore, there can be no assurance that others will not
independently develop similar technology or, if patents are issued to the
Company, that others will not design technology to circumvent the Company's
patents or proprietary rights.
A substantial majority of the Company's proprietary technology, including
much of its EIP(TM) technology, is not protected by patents and is held by the
Company as trade secrets. The Company's success will depend in part on its
ability to protect the trade secrets relating to extracting, isolating and
purifying paclitaxel as well as to other technology. The Company relies on
proprietary know-how and confidential information and employs various methods,
such as entering into confidentiality and non-compete agreements with its
current employees and with third parties to whom it divulges proprietary
information, to protect the processes, concepts, ideas and documentation
associated with its technologies, including its paclitaxel production process.
Such methods may afford incomplete protection and there can be no assurance
that the Company will be able to adequately protect its trade secrets or that
other companies will not acquire information which the Company considers to be
proprietary. In addition, if the Company is unable to fulfill its contractual
obligations to IVAX relating to its supply of NBT Paclitaxel, the Company may,
under certain circumstances, be contractually obligated to disclose
proprietary manufacturing information to IVAX. The inability to maintain its
trade secrets for its exclusive use could have a material adverse effect on
the Company.
The patent position of pharmaceutical companies generally is highly
uncertain and involves complex legal and factual questions. Paclitaxel is an
unpatentable, naturally-occurring compound. Various compositions containing
paclitaxel, and also various processes and other technologies,
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however, including those relating to extracting paclitaxel and preparing the
drug for finished formulation, are or may be patented. Certain of these
patents are owned by BMS and RPR, two of the Company's primary competitors.
The Company is aware of competitors and potential competitors who are pursuing
patent protection for various aspects of the extraction, preparation and
production of natural and semi-synthetic paclitaxel. In the event that the
Company's technology, products or activities are deemed to infringe upon the
rights of others, the Company could be subject to damages or enjoined from
using such technology, or the Company could be required to obtain licenses to
utilize such technology. No assurance can be given that any such licenses
would be made available on terms acceptable to the Company, or at all. If the
Company were unable to obtain such licenses or was enjoined from using its
technology, it could encounter significant delays in product market
introductions while it attempted to design around the patents or rights
infringed upon, or could find the development, manufacture or sale of products
to be foreclosed, any of which would have a material adverse effect on the
Company. In addition, the Company could experience a loss of revenues and may
incur substantial costs in defending itself and indemnifying the Strategic
Partners in patent infringement or proprietary rights violation actions
brought against it or either of the Strategic Partners. The Company could also
incur substantial costs in the event it finds it necessary to assert claims
against third parties to prevent the infringement of its patents and
proprietary rights by others. Participation in such infringement proceedings
could have a material adverse effect on the Company, even if the eventual
outcome were favorable. See "Risk Factors--Uncertainty of Protection of
Patents and Proprietary Technology; Reliance on Trade Secrets," "Risk
Factors--Uncertainty Related to Australian Patent Proceedings," "--Strategic
Alliances," and "--Australian Petty Patents."
AUSTRALIAN PETTY PATENTS
In September 1993 and August 1994, BMS received two Australian petty patents
claiming certain methods of administering paclitaxel. Australian petty patents
have a maximum term of six years, are allowed to contain only three claims
(one independent and two dependent) and are granted on the basis of a prior
art search which is significantly more limited in scope than the searches done
prior to issuance of standard patents. Following publication of these patents,
Faulding instituted legal action to revoke these patents on the grounds that
the patent claims are invalid and that the subject matter claimed in the
patents was already known prior to the claimed date of invention. In February
1995, BMS brought legal action against Faulding, based upon these patent
claims, seeking an injunction against Faulding to prevent Faulding from
marketing NBT Paclitaxel pursuant to Faulding's generic approval. In March
1995, the Australian court denied BMS's request to enjoin Faulding from
marketing NBT Paclitaxel. The Company believes, based on communications with
Faulding, that BMS's claims will likely be resolved in conjunction with
Faulding's revocation action in late 1996 or early 1997. No assurance can be
given, however, that BMS will not obtain an injunction against Faulding which
could prevent Faulding from marketing NBT Paclitaxel in Australia. If Faulding
were prevented from marketing NBT Paclitaxel in Australia pursuant to its
generic approval, Faulding would be unable to market NBT Paclitaxel for
commercial sale in Australia until such time as Faulding obtains its own non-
generic approval which will require substantial clinical trials and regulatory
approval. There can be no assurances, however, that Faulding would be able to
obtain its own non-generic approval in such circumstances. If BMS is
successful in enforcing its patent claims against Faulding such that Faulding
is unable to sell NBT Paclitaxel in Australia, the Company's business,
financial condition and results of operations would be materially and
adversely affected. See "Risk Factors--Uncertainty of Protection of Patents
and Proprietary Technology; Reliance on Trade Secrets," "Risk Factors--
Uncertainty Related to Australian Patent Proceedings," "--Patents and
Proprietary Technology," and "-- Strategic Alliances."
41
<PAGE>
GOVERNMENT REGULATION AND PRODUCT APPROVALS
The production and marketing of NBT Paclitaxel and the Company's research
and development activities are subject to extensive regulation by numerous
governmental authorities in the United States and other countries. In the
United States, drugs are subject to FDA regulation. The FDC Act, and the
regulations promulgated thereunder, and other federal and state statutes and
regulations govern, among other things, the testing, manufacture, quality,
safety, efficacy, labeling, storage, advertising and promotion of
pharmaceutical products. Product development within this regulatory framework
takes a number of years and involves the expenditure of substantial resources.
The marketing of drugs in the United States may not begin without FDA
approval.
The steps required before a pharmaceutical product may be marketed in the
United States include: (i) preclinical laboratory tests, animal pharmacology,
toxicology studies and formulation studies; (ii) the submission to the FDA of
an IND for human clinical testing, which must become effective before human
clinical trials commence; (iii) adequate and well-controlled human clinical
trials to establish the safety and efficacy of the drug; (iv) the submission
of an NDA to the FDA; and (v) FDA approval of the NDA prior to any commercial
sale or shipment of the drug. In addition to safety and efficacy requirements,
the FDA requires the applicant to demonstrate to the FDA's satisfaction that
it can manufacture the drug in compliance with the FDA's cGMP regulations. In
addition to obtaining FDA approval for each product, each domestic drug
manufacturing establishment must be registered with the FDA. Domestic drug
manufacturing establishments are subject to regular inspections by the FDA and
must comply with cGMP regulations. To supply products for use in the United
States, foreign manufacturing establishments must comply with cGMP regulations
and are subject to periodic inspection by the FDA or by corresponding
regulatory agencies in their home countries under reciprocal agreements with
the FDA.
Preclinical studies include the laboratory evaluation of in vitro
cytotoxicity, pharmacology, product chemistry and formulation, as well as
animal studies to assess the potential safety and efficacy of the product.
Compounds must be formulated according to cGMP, and preclinical safety tests
must be conducted by laboratories that comply with FDA regulations regarding
good laboratory practices. The results of the preclinical tests are submitted
to the FDA as part of an IND and are reviewed by the FDA prior to the
commencement of human clinical trials. The data in an IND consists of animal
data on safety and efficacy, possibly human data from a related use, and
chemistry, formulation and manufacturing data. If the FDA objects, the study
may not commence. There can be no assurance that submission of an IND will
result in FDA authorization to commence clinical trials.
Clinical trials involve the administration of the investigational new drug
to patients under the supervision of a qualified principal investigator.
Clinical trials must be conducted in accordance with good clinical practices
under protocols that detail the objectives of the study, the parameters to be
used to monitor safety and the efficacy criteria to be evaluated. Each
protocol must be submitted to the FDA as part of the IND. Each clinical study
must be conducted under the auspices of an Institutional Review Board ("IRB")
at the institution at which the study will be conducted. The IRB will
consider, among other things, the safety of human subjects and the possible
liability of the institution. The company sponsoring the trials is required to
select qualified investigators to supervise the administration of the drug and
to ensure that the trials are adequately monitored in accordance with FDA
regulations.
Clinical trials typically are conducted in three sequential phases, which
may overlap. In Phase I, the initial introduction of the drug into healthy
subjects, the drug is tested for safety (adverse effects), dosage tolerance,
metabolism, distribution, excretion and pharmacodynamics (clinical
pharmacology). Phase II involves studies in a limited patient population to:
(i) determine the efficacy of the drug for specific, targeted indications;
(ii) determine dosage tolerance and optimal dosage; and (iii) identify
possible adverse effects and safety risks. When a compound is found to be
effective and to have an
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<PAGE>
acceptable safety profile in Phase II evaluations, Phase III trials are
undertaken to evaluate further clinical efficacy and to test further for
safety within an expanded patient population at geographically dispersed
clinical study sites. Clinical trials require substantial time and effort.
There can be no assurance that Phase I, Phase II or Phase III testing will be
completed successfully within any specific time period, if at all.
Furthermore, although certain clinical trials have been completed to date, the
Company, the Strategic Partners or the FDA may modify, suspend or terminate
clinical trials at any time if they feel that the subjects or patients are
being exposed to an unacceptable health risk.
The results of the pharmaceutical development, preclinical studies and
clinical studies are submitted to the FDA in the form of an NDA for approval
of the marketing and commercial shipment of the drug. An NDA is a systematic
compilation of data, analysis and conclusions on a new drug product based on
studies conducted under an IND. The NDA testing and approval process requires
substantial time and effort, and there can be no assurance that approval will
be granted on a timely basis, if at all. The FDA may refuse to approve an NDA
if the FDA does not view the NDA as containing adequate evidence of the safety
and efficacy of the drug, or if other applicable regulatory criteria are not
satisfied. In addition, the FDA may require additional testing or information,
or require post-marketing testing and surveillance. Notwithstanding the
submission of complete data, the FDA may ultimately decide that the
application does not satisfy its criteria for approval. Moreover, if
regulatory approval of a drug is granted, such approval may entail limitations
on the indicated uses for which the drug may be marketed. Finally, product
approvals may be withdrawn if compliance with regulatory standards is not
maintained or if problems occur following initial marketing or if previously
unknown information demonstrates a lack of safety or effectiveness. Following
an approved NDA, an SNDA may be submitted to the FDA which requests a change
in the existing approval. An SNDA can be for changes in manufacturing, quality
control or clinical data or for changes in product labeling such as
indications or warnings.
Manufacturers of drugs sold in the United States are required to satisfy the
FDA that their manufacturing facilities and processes adhere to applicable
standards for cGMP and to engage in extensive record keeping and reporting.
Thus, even if regulatory approval for NBT Paclitaxel is granted, the Company's
current and any future facilities will be subject to periodic review and
inspections by the FDA or the analogous regulatory authorities of other
countries for compliance with cGMP or similar foreign regulatory standards.
Compliance with cGMP regulations requires substantial time, attention and
financial resources. Following inspections of the Company's United States and
Canadian manufacturing facilities by a cGMP Auditor of the Australian TGA, the
TGA issued approvals to the Company as an Australian cGMP compliant paclitaxel
manufacturer. The Company's facilities, however, have not been inspected by
the FDA for regulatory compliance purposes. There can be no assurance that the
FDA or foreign regulatory authorities other than the TGA will find the
Company's current facilities or facilities being constructed to be in
compliance with United States cGMP regulations or analogous foreign standards.
Subsequent discovery of previously unknown problems with a product or the
Company's manufacturing facilities may result in restrictions, including
withdrawal of the product from the market. Failure to comply with the
applicable regulatory requirements by either the Company or its Strategic
Partners could, among other things, result in criminal prosecution and fines,
product recalls, product seizures and operating restrictions.
The Company is also subject to United States laws and regulations applicable
to exporting drugs. On April 26, 1996, the export provisions in the FDC Act
were amended in Chapter 1A of Title II, Supplemental Appropriations For The
Fiscal Year Ending September 30, 1996, in the "FDA Export Reform and
Enhancement Act of 1996" to authorize the export of a drug before marketing
approval is obtained in the United States, to any country, if the drug (a)
complies with the laws of the importing country, and (b) has valid marketing
authorization by the appropriate authority in a country listed by the statute,
one of which is Australia. The Company has received valid marketing
authorization from Australia. Thus, if the other statutory conditions are met,
the Company believes that future exports
43
<PAGE>
from the United States of NBT Paclitaxel labeled in accordance with the laws
of Australia and, for countries other than Australia, of the importing
country, should be permissible without an FDA permit or other FDA approval
although no assurance can be given.
The Company is also subject to, among others, the regulations of Canada, the
Province of British Columbia, the United States Environmental Protection
Agency, the Department of Interior (United States Fish and Wildlife Services
and the Bureau of Land Management), the Department of Agriculture (United
States Forest Service) and other countries and regulatory agencies. Pursuant
to the National Environmental Policy Act, certain United States agencies have
prepared an Environmental Impact Statement that addresses the impact of
harvesting wild Pacific yew trees, including cutting down wild Pacific yew
trees on federally-managed land. Although the Company ceased harvesting bark
in August 1994, the Company has in its inventory bark obtained from the wild
Pacific yew tree. The Company is also subject to federal, state and local laws
and regulations governing the use and disposal of hazardous materials as well
as regulations imposed by the Occupational Safety and Health Administration
governing worker safety. There can be no assurance that the Company is at all
times in complete compliance with all such requirements. The Company has made
and will continue to make expenditures to comply with environmental
requirements. Compliance with these regulations is time-consuming and
expensive. The failure to comply with these regulations, however, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The adoption by federal, state or local governments of significant new laws
or regulations or a change in the interpretation or implementation of existing
laws or regulations relating to environmental or other regulatory matters
could increase the cost of producing products, including, delay regulatory
approval or otherwise adversely affect the Company's ability to produce or
sell NBT Paclitaxel or other products. Adverse governmental regulations which
might arise from future legislative or administrative regulations or other
actions cannot be predicted. In addition, the Company's activities have been
opposed by the ONRC because of their concern over wild Pacific yew in old
growth forests. Even though the Company no longer harvests biomass from the
bark of the wild Pacific yew, there can be no assurance that the ONRC and
other environmental activist groups will not oppose other activities of the
Company, which may have the effect of delaying or halting production of NBT
Paclitaxel, each of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
Outside the United States, the Company's ability to market a product is
contingent upon receiving a marketing authorization from the appropriate
regulatory authority. This foreign regulatory approval process includes all of
the risks associated with FDA approval set forth above.
The Company has filed confidential DMFs containing certain of the Company's
proprietary manufacturing processes with regulatory agencies in the United
States, Australia, Canada, Europe and Singapore, relating to the Company's
manufacture of NBT Paclitaxel. Faulding, using the Company's Australian DMF,
has received marketing approval in Australia for NBT Paclitaxel for treating
refractory ovarian and breast cancers. Additionally, Faulding has completed
clinical trials with NBT Paclitaxel in Australia, which may form the basis for
applications for further marketing approvals in Australia and other countries
where Faulding has the right to market NBT Paclitaxel. Faulding is also
engaged in ongoing clinical research with NBT Paclitaxel with the goal of
improving the effectiveness of paclitaxel treatment in combination therapies
and expanding the number of disease indications treatable with paclitaxel.
There can be no assurance that Faulding's efforts to expand the use of NBT
Paclitaxel will be successful.
IVAX, using the Company's United States DMF, filed an IND with the FDA in
June 1994 relating to NBT Paclitaxel and began its Phase I clinical trials
relating to NBT Paclitaxel in the United States in October 1994. IVAX began
Phase II/III clinical trials in May 1995. Based upon communications from
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<PAGE>
IVAX, it is estimated that the earliest IVAX could file a NDA seeking
commercial approval to sell NBT Paclitaxel in the United States is 1997. No
assurance can be given, however, that NBT Paclitaxel will prove to be safe and
effective in clinical trials, that IVAX will file the NDA within the time
period indicated, or that IVAX will complete any clinical trials or obtain
regulatory approvals for NBT Paclitaxel in a timely manner, or at all, to
market NBT Paclitaxel in the United States or other countries. See "Risk
Factors--Government Regulation; No Assurance of Regulatory Approval" and "Risk
Factors--Risk of Product Liability; Limited Insurance."
RESEARCH AND DEVELOPMENT
During the years ended December 31, 1993, 1994 and 1995, the Company spent
approximately $3.5 million, $3.9 million and $4.6 million, respectively, on
Company sponsored research and development activities and to produce NBT
Paclitaxel sold to its Strategic Partners (including $1.2 million and $0.3
million in plantation development fees in 1994 and 1995, respectively).
Research and development is expected to remain a significant cost component of
the Company's business. In the short term, research and development is
expected to concentrate primarily on: (i) improving paclitaxel yield and
reducing production costs; (ii) developing the Company's semi-synthesis
process for paclitaxel production; and (iii) improving the yields of the
Company's production methodology for processing needles and limbstock. The
Company will focus its internal efforts on process development and plans to
contract out research considered essential but for which it lacks facilities
or staff. The Company also intends to engage in early stage research and
development to identify other potential natural product pharmaceuticals.
FOREIGN AND DOMESTIC OPERATIONS; EXPORT SALES
The following table sets forth, for the past three fiscal years, and the
three months ended March 31, 1995 and 1996 revenue, profitability (operating
loss) and identifiable assets attributable to the Company's United States and
foreign operations (in thousands of dollars):
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER ENDED
31, MARCH 31,
---------------------- -------------
1993 1994 1995 1995 1996
------ ------ ------ ----- ------
<S> <C> <C> <C> <C> <C>
Sales to Unaffiliated Customers
United States(1)..................... $1,248 $ 854 $2,054 $ 979 $ 214
Foreign.............................. -- 148 569 169 477
Operating Loss
United States........................ (4,954) (5,914) (3,851) (620) (1,473)
Foreign.............................. -- (68) (433) (26) (325)
Identifiable Assets
United States........................ 2,120 4,304 5,133 3,633 4,660
Foreign.............................. -- 672 6,820 818 5,546
</TABLE>
- --------
(1)Includes export sales of $998 in 1993 and $1,392 in 1995.
Foreign sales include sales of product manufactured and shipped from NaPro
Canada, the Company's Canadian subsidiary. Such products sold by NaPro Canada
to the Company are then re-sold to Faulding for use outside the United States.
Such "exported" products never physically enter the United States.
Sales of NBT Paclitaxel into foreign markets accounted for approximately
75% of the Company's revenues for the year ended December 31, 1995 and 69% of
the Company's revenues for the three months ended March 31, 1996. The Company
anticipates that a significant portion of its revenues
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<PAGE>
will continue to be derived from sales of its products in foreign markets
until such time, if ever, as IVAX receives approval for commercial sale of NBT
Paclitaxel in the United States.
A substantial portion of the Company's revenues and operations will thus
continue to be subject to the risks associated with foreign business,
including economic or political instability, shipping delays, fluctuations in
foreign currency exchange rates and various trade restrictions, all of which
could have a significant impact on the Company's ability to deliver products
on a competitive and timely basis. Future imposition of, or significant
increases in, the level of customs duties, export quotas, drug regulatory
restrictions or other regulatory or trade restrictions could have an adverse
effect on the Company. See "Risk Factors--Reliance on Foreign Sales."
EMPLOYEES
As of June 30, 1996, the Company had 75 full-time and four part-time
employees, of whom six hold Ph.D. or M.D. degrees. Four employees were engaged
in biological and clinical research, nine in chemistry, 16 in quality
control/quality assurance, 30 in manufacturing and 16 in general
administration and finance. The Company believes that its relations with its
employees are good.
PROPERTIES
The Company leases approximately 54,000 square feet of space in Boulder,
Colorado, which will be used for research and development and commercial-scale
manufacturing upon completion of improvements and installation and validation
of equipment. This facility currently is used for the Company's executive
offices and warehousing of raw materials and equipment. The Company leases an
additional 5,900 square feet of space in Boulder, of which 1,300 square feet
is used for research and development and 4,600 square feet is used for
manufacturing. The Company leases a facility of approximately 3,400 square
feet in British Columbia, Canada which is used for manufacturing. The Company
leases an additional 10,090 square foot facility in British Columbia, Canada,
which the Company subleases. The Company has an option to purchase 7.3 acres
of land in Longmont, Colorado as a potential site on which to build a
manufacturing facility.
LEGAL PROCEEDINGS
The Company is not currently engaged in any material legal proceedings. See
"Risk Factors--Uncertainty of Protection of Patents and Proprietary
Technology; Reliance on Trade Secrets," "Risk Factors--Uncertainty Related to
Australian Patent Proceedings," "Risk Factors--Risk of Product Liability;
Limited Insurance," "--Patents and Proprietary Technology" and "--Australian
Petty Patents."
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning directors and
executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ------------------------------------- --- --------------------------------------
<S> <C> <C>
Leonard P. Shaykin(3) ............... 52 Chairman of the Board of Directors
Sterling K. Ainsworth, Ph.D.(3) ..... 56 President and Chief Executive Officer;
Director
Patricia A. Pilia, Ph.D.............. 47 Vice President, BioResearch and
Toxicology; Secretary; Treasurer;
Director
Lawrence Helson, M.D................. 65 Vice President, Clinical Research
Gordon H. Link, Jr................... 42 Vice President, Finance and Chief
Financial Officer
David L. Denny....................... 44 Vice President, Operations
James D. McChesney, Ph.D............. 56 Vice President, Natural Products
Chemistry
E. Garrett Bewkes, Jr.(1)(2)......... 68 Director
Richard C. Pfenniger, Jr.(2)(3) ..... 40 Director
Phillip Frost, M.D................... 59 Director
Arthur H. Hayes, Jr., M.D.(3) ....... 62 Director
Mark B. Hacken(1).................... 60 Director
Vaughn D. Bryson(2)(3) .............. 56 Director
</TABLE>
- --------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of the Strategic Planning Committee
At the July 30, 1996 annual meeting of stockholders, the stockholders of the
Company approved an amendment to the Company's Certificate of Incorporation
providing for a classified board of directors and elected the following
directors to serve for staggered three-year-terms as follows: Mr. Shaykin and
Drs. Frost and Hayes for a term expiring at the 1997 annual meeting of
stockholders; Dr. Pilia and Messrs. Bewkes and Bryson for a term expiring at
the 1998 annual meeting of stockholders; and Dr. Ainsworth and Messrs. Hacken
and Pfenniger for a term expiring at the 1999 annual meeting of stockholders.
At each annual meeting of stockholders, a new class of directors will be
elected for a three-year term to succeed the directors of the same class whose
terms are then expiring.
MR. SHAYKIN has served as Chairman of the Board of Directors of the Company
since June 1993. Pursuant to his Executive Agreement, Mr. Shaykin is not
required to devote more than 20 hours in any week nor more than 80 hours in
any month to the Company's affairs. In 1995, Mr. Shaykin founded Shaykin &
Company, a private investment and management holding company. Prior to
founding Shaykin & Company, Mr. Shaykin served as a founding and managing
partner of Adler & Shaykin, an equity investment partnership organized to
sponsor leveraged buyouts. Prior thereto, Mr. Shaykin was Vice President,
director and a member of the Investment Committee of Citicorp Venture Capital,
Ltd. and Citicorp Capital Investors, Inc., the venture capital and equity
investment subsidiaries of Citicorp and Citibank. Mr. Shaykin is Chairman of
the Board of Directors of Kimeragen, Inc., a privately-held gene repair
company, a director of Avigen, a public gene therapy company,
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<PAGE>
Chairman of the Neuroblastoma Foundation, and a director of the Jerusalem
Post, an English-language offshore newspaper. Mr. Shaykin is also a governing
trustee of The Jackson Laboratories, a not-for-profit genetic research
institute and a trustee of the University of Chicago Graduate School of
Business. Mr. Shaykin is a graduate of the University of Chicago (B.A., M.A.,
M.B.A.).
DR. AINSWORTH, a co-founder of the Company, has served as an executive
officer and director of the Company since its inception, as Chief Executive
Officer since November 1991 and as President since October 1992. In 1990, he
co-founded, with Dr. Pilia, Pacific Biotechnology, Inc. (a predecessor of the
Company with no connection to PBI) and served as Chairman and President of
such company until the Company's inception. From 1972 until 1990, Dr.
Ainsworth held various levels of professorships of pathology with tenure at
the College of Medicine and Dental Medicine and Graduate Studies at the
Medical University of South Carolina ("MUSC"), where he established, developed
and directed MUSC's Immunopathology Diagnostic Laboratory. Dr. Ainsworth
received a Bachelor's degree from the University of Mississippi in 1963. He
received a Master's degree in Medical Microbiology in 1965 and a Doctoral
degree in Medical Science in 1969 from the University of Mississippi Medical
School. He completed his post-doctoral fellowship in the Department of
Pathology at Harvard Medical School from 1970 to 1972. Dr. Ainsworth is
engaged to marry Dr. Pilia, a director and executive officer of the Company.
DR. PILIA, a co-founder of the Company, has served as a director of the
Company since its inception. She was appointed Secretary of the Company in
November 1991, Treasurer of the Company in October 1992 and Vice President,
BioResearch and Toxicology in March 1993. In 1990, she co-founded, with Dr.
Ainsworth, Pacific Biotechnology, Inc. and served as its Vice President and
Director of Biotechnology. From 1983 to 1991, Dr. Pilia was an Assistant
Professor of Pathology in the College of Medicine and Dental Medicine and the
College of Graduate Studies at MUSC. From 1985 to 1991, she served as the
Assistant Director of the MUSC Immunopathology Diagnostic and Research
Laboratories. Prior thereto, Dr. Pilia was a consultant on the design and
development of biomedical devices and treatment modalities and the design and
performance of clinical trials. Dr. Pilia received a Bachelor's degree in 1970
from Boston University, a Master's degree in Immunology/Microbiology in 1978
and a Doctoral degree in Pathology in 1980 from MUSC. Dr. Pilia is engaged to
marry Dr. Ainsworth, a director and Chief Executive Officer of the Company.
DR. HELSON joined the Company as a director and in the part-time position of
Vice President, Clinical Research in July 1993. Dr. Helson served as a
director of the Company until March 1996. Since July 1988, Dr. Helson has been
head of the Neuro-Oncology Laboratory in the Division of Neoplastic Diseases,
Department of Medicine at New York Medical College. From July 1986 until June
1988, Dr. Helson was an Associate Director with ICI Pharmaceuticals. From July
1968 until June 1986, Dr. Helson was an attending physician with Memorial
Sloan-Kettering, a cancer research center. Pursuant to his Executive
Agreement, Dr. Helson is not required to devote more than 15 hours in any week
nor more than 60 hours in any month to the Company's affairs. Dr. Helson
received his B.S. from the College of the City of New York in 1953, his M.S.
from the New York University Graduate School of Arts and Sciences in 1957 and
his M.D. from the University of Geneva (Switzerland) Medical School in 1962.
MR. LINK, a certified public accountant and a certified management
accountant, joined the Company as Vice President, Finance and Chief Financial
Officer in September 1993. Prior thereto, Mr. Link served concurrently as
Corporate Controller of Synergen, Inc. and of the Syntex-Synergen Neuroscience
Joint Venture. From February 1991 until April 1993, Mr. Link served as
Treasurer of Synergen Development Corporation. From October 1983 to May 1990,
Mr. Link practiced as a certified public accountant, most recently in the
position of Audit Manager, with Deloitte & Touche. He received undergraduate
degrees in chemistry from Rensselaer Polytechnic Institute in 1976 and in
accounting from Metropolitan State College in 1983.
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<PAGE>
MR. DENNY has served as Vice President, Operations since September 1995.
From 1993 to 1995, Mr. Denny served as a private pharmaceutical manufacturing
consultant. From 1991 to 1993, Mr. Denny served as Vice President of
Operations for Somatogen, Inc. Prior thereto, Mr. Denny served in
manufacturing and quality assurance capacities with Miles Pharmaceutical,
Abbott Laboratories and Kabi-Pharmacia. He received a B.S. in Biological
Sciences from Tennessee Technological University in 1972 and attended graduate
school at the same institution from 1972 to 1974.
DR. MCCHESNEY joined the Company as Vice President, Natural Products
Chemistry in January 1996. From 1987 until June 1995, he served as Director of
the Research Institute of Pharmaceutical Sciences at University of
Mississippi, specializing in natural product pharmaceutical research and
development. In July 1993, Dr. McChesney was named Frederick A.P. Barnard
Distinguished Professor of Pharmacognosy at the University of Mississippi. Dr.
McChesney joined the School of Pharmacy at the University of Mississippi in
1978 as Professor and Chair of the Department of Pharmacognosy. After
graduating with honors from Iowa State University in 1961 with a B.S. in
Chemical Technology, he earned degrees in Botany (M.A. 1964) and Natural
Products Chemistry (Ph.D. 1965) at Indiana University. He has been a Fulbright
Lecturer in Brazil and a visiting professor at several South American
universities.
MR. BEWKES has served as a director of the Company since September 1993. Mr.
Bewkes has been a director of PaineWebber Group, Inc. and a consultant and
Chairman of a number of PaineWebber mutual funds since April 1987. From 1982
until 1987 he was Chairman of American Bakeries Corp. and currently serves as
a director of Interstate Bakeries Corp.
MR. PFENNIGER has served as a director of the Company since June 1993. Mr.
Pfenniger has served as Chief Operating Officer of IVAX since April 1994. He
served as Senior Vice President-Legal Affairs, Secretary and General Counsel
of IVAX from 1989 until April 1994 and as Secretary of IVAX from 1990 until
April 1994. During the seven-year period prior to joining IVAX, Mr. Pfenniger
was engaged in private law practice, most recently as a member of the law firm
of Greer, Homer & Bonner, P.A. in Miami, Florida. Mr. Pfenniger is a director
of Whitman Education Group, Inc. and North American Vaccine, Inc.
DR. FROST has served as a director of the Company since June 1993. Dr. Frost
has served as Chairman and Chief Executive Officer of IVAX since 1987 and from
July 1981 to January 1995 as President of IVAX. He is the Vice Chairman of the
Board of Directors of North American Vaccine, Inc. Dr. Frost was the Chairman
of the Department of Dermatology at Mt. Sinai Medical Center of Greater Miami
from 1972 to 1990. He was Chairman of the Board of Directors of Key
Pharmaceuticals, Inc. from 1972 to 1986. He is a director of American
Exploration Company (an oil and gas exploration company), Whitman Education
Group, Inc. and Northrop Grumman Corporation. He is a trustee of the
University of Miami and a member of the Board of Governors of the American
Stock Exchange.
DR. HAYES was appointed a director of the Company in March 1996. He is
currently President and Chief Operating Officer of MediScience Associates,
Inc., a pharmaceutical consulting company and is a clinical Professor of
Medicine at New York Medical College and Pennsylvania State University College
of Medicine. From 1981 to 1983, Dr. Hayes served as the Commissioner of the
FDA. From 1986 to 1991, he was President and Chief Executive Officer of
EM Pharmaceuticals as well as a member of their board of directors. Dr. Hayes
served as Provost & Dean at New York Medical College from 1983 to 1986 and
served as the Director of the Institute of Human Values in Medical Ethics,
International Health and Biomedical Sciences, the latter of which he also
served as Chairman. Dr. Hayes has held several posts with Pennsylvania State
University which included Professor of Medicine and Pharmacology from 1977 to
1981, Dean of Admissions from 1976 to 1979, Associate Professor of Medicine
and Pharmacology and Director of the Division of Clinical Pharmacology from
1972 to 1977. Dr. Hayes currently serves on the board of directors of Myriad
Corporation (a genomic research and pharmaceutical company) and of Celgene
Corporation (a pharmaceutical company). Dr. Hayes
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<PAGE>
received his M.D. from Cornell University Medical College, and also attended
Cornell's Graduate School of Medical Sciences, Department of Pharmacology. He
undertook premedical studies, and attended medical school at Georgetown
University. Dr. Hayes received his M.A. (Philosophy, Politics and Economics)
from Oxford University, where he was a Rhodes Scholar, and his A.B.
(Philosophy) from Santa Clara University in 1955.
MR. HACKEN was appointed a director of the Company in March 1996. He is
currently President of MBH International, a retail and health care consulting
company. He is the former Chief Executive Officer of FHP International
Corporation ("FHP International"), a $4 billion HMO with members in 11 states,
and its operating subsidiary, FHP Incorporated ("FHP Incorporated") (a
diversified health care services company). Prior to his appointment to the
Office of the Chief Executive in October 1993, he served on the FHP
International and FHP Incorporated boards of directors for two years and seven
years, respectively. He was co-founder and President of Elliott Drugs, and
President of Drug King after the firm was acquired from DART Industries. After
Drug King was sold to Thrifty Corporation, he was instrumental in converting
them to the Thrifty Jr. drug store concept and he was President of that
division. Mr. Hacken received a B.S. in Pharmacy from the University of
Florida.
MR. BRYSON was appointed a director of the Company in March 1996. Mr. Bryson
has been Vice Chairman of Vector Securities International, Inc. ("Vector"), a
specialty health care investment banking firm, since April 1994. Prior to
joining Vector, from 1961 to June 1993, Mr. Bryson worked in various positions
for Eli Lilly and Company ("Eli Lilly") for 32 years, including in
sales/market research, human resources, distribution, sales management and new
product planning. Mr. Bryson served as Eli Lilly's President and Chief
Executive Officer from 1991 until June 1993. Mr. Bryson was a director of Eli
Lilly from 1984 until his retirement in 1993. Mr. Bryson is a Director of
three public companies, ARIAD Pharmaceuticals, Inc., Endo Vascular
Technologies, Inc. and Perclose, Inc. Mr. Bryson earned a B.S. in Pharmacy
from the University of North Carolina and completed the Stanford Sloan Program
at the Stanford University Graduate School of Business.
BOARD OF DIRECTORS' COMMITTEES
The Board of Directors has established an audit committee (the "Audit
Committee"), a compensation committee (the "Compensation Committee") and a
strategic planning committee (the "Strategic Planning Committee"). The Audit
Committee, which currently consists of Mark B. Hacken, Chairman, and E.
Garrett Bewkes, Jr., meets periodically with representatives of the Company's
independent auditors and the Company's management to obtain an assessment of
the Company's financial condition and results of operations, reviews the
results and scope of the annual audit and other services provided by the
Company's independent auditors, and reports to the Board of Directors with
respect thereto. The Compensation Committee, which currently consists of Mr.
Bewkes, Chairman, Richard C. Pfenniger, Jr. and Vaughn D. Bryson meets
periodically to review and to recommend to the Board of Directors compensation
arrangements for senior management and directors. In addition, the
Compensation Committee is responsible for administering the Company's existing
stock option plans. The Strategic Planning Committee, which currently consists
of Vaughn D. Bryson, Chairman, Sterling K. Ainsworth, Leonard P. Shaykin,
Richard C. Pfenniger and Arthur Hayes, meets periodically to review corporate
opportunities and strategies.
DIRECTORS' COMPENSATION
Pursuant to an amendment to the Company's 1994 Long-Term Performance
Incentive Plan (the "1994 Plan"), non-employee directors automatically are
granted each year, on the date of the Company's annual meeting of
stockholders, non-qualified options to purchase 5,000 shares of Common Stock.
In addition, any non-employee director who is first appointed or elected other
than at an annual meeting of stockholders will receive non-qualified options
to purchase 5,000 shares of Common Stock upon such appointment or election.
All such options are exercisable at an exercise
50
<PAGE>
price equal to the fair market value of the Common Stock on the date of grant,
and are subject to certain vesting schedules. Contingent upon approval by the
stockholders, the Board of Directors has adopted amendments to the 1994 Plan
(the "1996 Amendments") to (i) increase the number of shares of Common Stock
underlying automatic annual grants of non-qualified stock options to non-
employee directors from 5,000 to 10,000 shares and (ii) provide for automatic
annual grants of non-qualified stock options to purchase 10,000 shares of
Common Stock to directors who serve as chair of the Audit, Compensation, and
Strategic Planning Committees of the Board of Directors. Automatic grants
associated with such amendments will be effective on the next business day
following the annual meeting, subject to approval of the proposed amendments.
Messrs. Bewkes, Frost and Pfenniger received option grants of 5,000 shares of
Common Stock each on June 3, 1995, the day following the 1995 stockholders
meeting. Such grants were at an exercise price of $7.66 per share. Messrs.
Hacken, Hayes and Bryson received option grants of 5,000 shares of Common
Stock in connection with their appointment as directors of the Company. Such
grants were at an exercise price of $11.125 per share. Directors are
reimbursed for their costs incurred in attending Board of Directors meetings.
In January 1994, each non-employee director was granted non-plan options to
purchase 5,000 shares of Common Stock and each chairman of the two standing
committees of the Board of Directors, the Audit Committee and the Compensation
Committee was granted non-plan options to purchase an additional 2,500 shares
of Common Stock and each other member of such committees was granted non-plan
options to purchase an additional 1,000 shares of Common Stock. All such
grants were at an exercise price of $2.40 per share. See "-- Compensation of
Executive Officers."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal year 1995, no executive officer of the Company served on the
compensation committee of another entity, no executive officer of the Company
served as a director of another entity who had an executive officer serving on
the Compensation Committee of the Company, and no executive officer of the
Company served as a member of the compensation committee of another entity who
had an executive officer serving on the Board of Directors. From January 1994
through March 1996, the Compensation Committee consisted of Mr. Bewkes,
Chairman, and Mr. Pfenniger. From March 1996 to the present, the Compensation
Committee has consisted of Mr. Bewkes, Chairman, Mr. Bryson, and Mr.
Pfenniger. Mr. Pfenniger serves as Chief Operating Officer of IVAX and held
various other executive positions with certain IVAX subsidiaries during 1995.
Mr. Shaykin, Chairman of the Board of Directors, was appointed to serve on the
Compensation Committee upon its inception in 1993 and resigned following its
first meeting in January 1994. Mr. Shaykin has been an employee of the
Company, and Chairman of the Board of Directors since 1993. Effective June 7,
1993, Mr. Shaykin executed a note in favor of the Company to represent the
amount owed by Mr. Shaykin's related to his acquisition of stock pursuant to
the Executive Agreement. See "Certain Relationships and Related Transactions--
Indebtedness of Management" and "Certain Relationships and Related
Transactions--IVAX."
51
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
EXECUTIVE COMPENSATION
The following table sets forth for the fiscal year ended December 31, 1995,
December 31, 1994 and December 31, 1993, the compensation paid to, or earned
by, the Company's Chief Executive Officer and its three other most highly
compensated executive officers whose cash compensation exceeded $100,000 (the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------------- -------------------------------
AWARDS PAYOUTS
---------------------- -------
ALL
SECURITIES OTHER
OTHER ANNUAL RESTRICTED UNDER-LYING LTIP COMPEN-
NAME AND PRINCIPAL SALARY BONUS COMPENSATION STOCK OPTIONS/ PAYOUTS SATION
POSITION YEAR ($) ($) ($) AWARDS ($) SARS (#) ($) ($)
- ------------------ ---- -------- ------- ------------ ---------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sterling K. Ainsworth... 1995 $152,077 $20,000 -- $20,000 40,000 -- --
President and C.E.O. 1994 138,111 -- -- -- -- -- --
1993 99,769 -- -- -- -- -- --
Leonard P. Shaykin...... 1995 152,077 20,000 -- 20,000 100,000(1) -- --
Chairman of the Board 1994 106,192 -- -- -- -- -- --
1993 51,402 -- -- -- -- -- --
Patricia A. Pilia....... 1995 116,592 15,000 -- 15,000 20,000 -- --
Vice President 1994 96,077 -- -- -- -- -- --
1993 73,662 -- -- -- -- -- --
Gordon H. Link, Jr...... 1995 101,385 10,000 -- 10,000 10,000 -- --
Vice President 1994 92,480 -- -- -- 16,667 -- --
1993 28,454(2) -- -- -- 26,667 -- --
</TABLE>
- --------
(1) Includes options to purchase 50,000 shares of Common Stock granted in
November 1995, subject to approval of the Company's stockholders of
amendments to the 1994 Plan.
(2) Reflects compensation paid to Mr. Link from the period September 1993 to
December 1993.
1994 LONG-TERM PERFORMANCE INCENTIVE PLAN
In May 1994, the Board of Directors adopted the 1994 Plan which was
subsequently approved by the stockholders of the Company prior to the IPO.
Certain amendments to the 1994 Plan were approved by the stockholders at the
July 1996 annual meeting of stockholders. The 1994 Plan, as amended, provides
for granting to employees and other key individuals who perform services for
the Company ("Participants") the following types of incentive awards: stock
options, stock appreciation rights ("SARs"), restricted stock, performance
units, performance grants and other types of awards that the Compensation
Committee deems to be consistent with the purposes of the 1994 Plan. In
addition, each person who is not an employee of the Company or one of its
subsidiaries and who is elected or re-elected as a director of the Company by
the stockholders at any annual meeting of stockholders commencing with the
1994 annual meeting, and, if first elected or appointed other than at an
annual meeting, upon such election or appointment, will receive, as of the
business day following the date of each such election or appointment, a non-
qualified option to purchase 10,000 shares of the Common Stock, and the
Chairman of the Compensation, Audit and Strategic Planning Committees of the
Board of Directors will receive annual grants of options to purchase 10,000
shares of Common Stock. The 1994 Plan affords the Company latitude in
tailoring incentive compensation to support corporate and business objectives,
to anticipate and respond to a changing business environment and competitive
compensation practices and, in the case of options granted to non-employee
directors, to strengthen further the non-employee directors' linkage with
stockholder interests. The following is a description of the principal
features of the 1994 Plan.
52
<PAGE>
The Compensation Committee has exclusive discretion to select the
Participants and to determine the type, size and terms of each award, to
modify the terms of awards, to determine when awards will be granted and paid,
and to make all other determinations which it deems necessary or desirable in
the interpretation and administration of the 1994 Plan. The 1994 Plan
terminates in 2004, unless extended for up to an additional five years by
action of the Board of Directors. With limited exceptions, including
termination of employment as a result of death, disability or retirement or
except as otherwise determined by the Compensation Committee, vesting of these
rights will be forfeited if a Participant's employment or performance of
services terminates within a specified period following the award. Generally,
a Participant's rights and interest under the 1994 Plan will not be
transferable except by will or by the laws of descent and distribution.
Options, which include non-qualified stock options and incentive stock
options, are rights to purchase a specified number of shares of Common Stock
at a price fixed by the Compensation Committee. The option price may not be
less than the fair market value of the underlying shares of Common Stock on
the date of grant. In the case of purchased stock options, a specified number
of non-qualified stock options (with an option price as described above) will
be offered for grant to selected Participants in exchange for a purchase
price, specified by the Compensation Committee, which is payable at the time
of grant. Options generally will expire not later than ten years after the
date on which they are granted. Options will become exercisable at such times
and in such installments as the Compensation Committee shall determine.
Payment of the option price must be made in full at the time of exercise in
such form (including, but not limited to, cash, Common Stock or the surrender
of another outstanding award or any combination thereof) as the Compensation
Committee may determine. Federal income tax payable as a consequence of the
exercise of such options is borne by the grantee.
An SAR may be granted alone, or a holder of an option or other award may be
granted a related SAR, either at the time of grant or by amendment thereafter.
Upon exercise of an SAR, the holder must surrender the SAR and surrender,
unexercised, any related option or other award, and the holder will receive in
exchange, at the election of the Compensation Committee, cash or Common Stock
or other consideration, or any combination thereof, equal in value to (or, in
the discretion of the Compensation Committee, less than) the difference
between the exercise price or option price per share and the fair market value
per share of Common Stock on the last business day preceding the date of
exercise, times the number of shares subject to the SAR or option or other
award, or portion thereof, which is exercised.
A restricted stock award is an award of a given number of shares of Common
Stock which are subject to a restriction against transfer and to a risk of
forfeiture during a period set by the Compensation Committee. During the
restriction period, the Participant generally has the right to vote and
receive dividends on the shares.
Performance grants are awards whose final value, if any, is determined by
the degree to which specified performance objectives have been achieved during
an award period set by the Compensation Committee, subject to such adjustments
as the Compensation Committee may approve based on relevant factors.
Performance objectives are based on such measures of performance, including,
without limitation, measures of industry, the Company, unit or Participant
performance, or any combination of the foregoing, as the Compensation
Committee may determine. The Compensation Committee may make such adjustments
in the computation of any performance measure as it may deem appropriate. A
target value of an award will be established (and may be amended thereafter)
by the Compensation Committee and may be a fixed dollar amount, an amount that
varies from time to time based on the value of a share of Common Stock, or an
amount that is determinable from other criteria specified by the Compensation
Committee. Payment of the final value of an award will be made as promptly as
practicable after the end of the award period or at such other time or times
as
53
<PAGE>
the Compensation Committee may determine. The 1994 Plan permits the grant of
many other types of incentive compensation awards determined by the
Compensation Committee to be consistent with the purpose of the 1994 Plan.
An aggregate of 875,000 shares of Common Stock of the Company were
authorized for issuance under the 1996 Amendments. Except for any other
adjustments made by the Compensation Committee relating to a stock split or
certain other changes in the number of shares of Common Stock, or to reflect
extraordinary corporate transactions, further increases in the number of
shares authorized for issuance under the 1994 Plan must be approved by the
stockholders of the Company.
Upon the happening of a liquidation or dissolution of the Company, all
outstanding awards under the 1994 Plan will terminate immediately prior to the
consummation of such liquidation or dissolution, unless otherwise provided by
the Compensation Committee. Upon the happening of certain events, including:
(i) any "person," as such term is used in Sections 13(d) and 14(d) of the
Exchange Act, as amended (the "Exchange Act") including a "group" as defined
in Section 13(d) of the Exchange Act but excluding the Company and any
subsidiary and any employee benefit plan sponsored or maintained by the
Company or any subsidiary (including any trustee of such plan acting as
trustee), directly or indirectly, becoming the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act, as amended from time to time) of
securities of the Company representing 25% or more of the combined voting
power of the Company's then outstanding securities; (ii) individuals who at
the beginning of any 12-month period constituted the Board of Directors
ceasing for any reason other than death to constitute a majority of the Board
of Directors; or (iii) approval by the Company's stockholders of a transaction
involving the acquisition of the Company by an entity other than the Company
or any subsidiary through purchase of assets, by merger, or otherwise, (A) any
SARs and any options become immediately exercisable in full; (B) restrictions
and deferral limitations applicable to any restricted stock and other awards
payable in shares of Common Stock lapse and become immediately exercisable in
full; (C) generally, outstanding performance grants become vested and will be
paid out based on the prorated target results for the awards period in
question; and (D) generally, the value of all outstanding options, SARs,
restricted stock, performance grants and any other type of award payable in
shares of Common Stock will be cashed out.
1993 STOCK OPTION PLAN
In 1993, the Company adopted its 1993 Stock Option Plan (the "1993 Plan")
covering up to 146,667 shares of Common Stock. Under the 1993 Plan, statutory
incentive stock options, as provided in Section 422 of the Internal Revenue
Code of 1986, as amended, or nonstatutory options to purchase shares of Common
Stock may be granted to employees of the Company or its subsidiary and certain
other categories of individuals as may be selected and approved by the Board
of Directors. As of December 31, 1995, options to purchase all 108,348 of the
shares of Common Stock reserved for issuance were outstanding at an average
exercise price of approximately $1.80 per share and no shares of Common Stock
had been issued upon exercise of such options.
The 1993 Plan is administered by the Compensation Committee. The
Compensation Committee has the authority, subject to the terms of the 1993
Plan, to determine and designate the recipients of the options, dates the
options are granted, number of shares of Common Stock subject to options,
option prices, vesting terms, fair market value of the Common Stock, duration
of the options and whether the options granted to employees are to be
incentive stock options. The purchase price of Common Stock upon exercise of
incentive stock options may not be less than 100% of the fair market value of
the Common Stock on the date of the grant and the purchase price of Common
Stock upon exercise of nonstatutory incentive stock options may be less than,
greater than or equal to such fair market value. Unless otherwise determined
by the Board of Directors, the maximum term of incentive stock options is
eight years (or five years in the case of options issued for fewer than 667
shares) but, in no event, for longer than ten years from the date of grant.
Incentive options are exercisable only
54
<PAGE>
during the holder's employment by the Company or its subsidiary, and for a
period of up to 30 days after the termination of such holder's employment.
Incentive options may not be transferred other than by will or the laws of
descent and distribution. None of the options outstanding pursuant to the 1993
Plan are statutory incentive stock options. In general, unless the Board of
Directors determines otherwise, options for 667 shares or more become
exercisable as to 25% after each anniversary date of the grant and are fully
vested four years after the grant date. Options for fewer than 667 shares
generally become exercisable as to 50% after each anniversary date of the
grant and are fully vested two years after the grant date. Federal income tax
payable as a consequence of the exercise of such options is borne by the
grantee.
Upon the occurrence of certain events, including: (i) any "person," as such
term is used in Sections 13(d) and 14(d) of the Exchange Act, including a
"group" as defined in Section 13(d) of the Exchange Act but excluding the
Company and any subsidiary and any employee benefit plan sponsored or
maintained by the Company or any subsidiary (including any trustee of such
plan acting as trustee), directly or indirectly, becoming the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act, as amended from time
to time) of securities of the Company representing 25% or more of the combined
voting power of the Company's then outstanding securities; (ii) individuals
who at the beginning of any 12-month period constituted the Board of Directors
ceasing for any reason other than death to constitute a majority of the Board
of Directors; or (iii) approval by the Company's stockholders of a transaction
involving the acquisition of the Company by an entity other than the Company
or any subsidiary through purchase of assets, by merger, or otherwise, all
options outstanding under the 1993 Plan become immediately exercisable in
full.
The following table sets forth each grant of options to purchase Common
Stock made during the year ended December 31, 1995 to each of the Named
Executive Officers. Grants of options to each of the Named Executive Officers
were made under the 1994 Plan:
OPTIONS GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
% OF
TOTAL POTENTIAL REALIZABLE
NUMBER OF OPTIONS VALUE AT ASSUMED
SECURITIES GRANTED ANNUAL RATES OF STOCK
UNDERLYING TO EXERCISE OR PRICE APPRECIATION FOR
OPTIONS EMPLOYEES BASE PRICE OPTION TERM($)(4)
GRANTED IN FISCAL PER SHARE EXPIRATION ----------------------
NAME (#)(1) YEAR(2) ($/SH) DATE(3) 5% 10%
- ------------------------ ---------- --------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Sterling K. Ainsworth... 40,000 11.83% $10.125 11/15/05 $ 659,702 $ 1,050,466
Leonard P. Shaykin...... 100,000 29.57% 10.125 11/15/05 1,649,256 2,626,154
Patricia A. Pilia....... 20,000 5.91% 10.125 11/15/05 329,851 525,233
Gordon H. Link, Jr. .... 10,000 2.96% 10.125 11/15/05 164,926 262,616
</TABLE>
- --------
(1) Options granted under the 1994 Plan become exercisable at the rate of 25%
of the shares subject to the option one year after the date of grant and
25% of the shares subject to the option each year thereafter.
(2) Based on an aggregate of 338,125 options granted under the 1994 Plan to
employees of the Company, including the Named Executive Officers.
(3) These options have a 10-year term, subject to earlier termination upon
death, disability or termination of employment.
(4) The potential realizable value is calculated based on the term of the
option at its time of grant (10 years). It is calculated by assuming that
the stock price on the date of grant appreciates at the indicated annual
rate compounded annually for the entire term of the option and that the
option is exercised and sold on the last day of its term for the
appreciated stock price. No gain to the optionee is possible unless the
stock price increases over the option term, which will benefit all
stockholders.
55
<PAGE>
The following table sets forth (i) the number of unexercised options held by
the Named Executive Officers as of December 31, 1995 and (ii) the value as of
December 31, 1995 of unexercised in-the-money options.
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER
OF SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS/SAR'S AT VALUE OF UNEXERCISED
FISCAL YEAR END (#) IN-THE-MONEY OPTIONS/SARS
EXERCISABLE/ AT FISCAL YEAR END ($)(1)
NAME UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------------ -------------------------
<S> <C> <C>
Sterling K. Ainsworth......... 122,667 / 40,000 $1,127,003 /$0
President and C.E.O.
Leonard P. Shaykin............ 0/100,000 0/0
Chairman of the Board
Patricia A. Pilia............. 36,800/20,000 338,100/0
Vice President, Secretary and
Treasurer
Gordon H. Link, Jr............ 19,167/34,167 146,465/162,890
Vice President and Chief
Financial Officer
</TABLE>
- --------
(1) Represents the difference between the option exercise price and the
closing price of the Company's Common Stock as quoted on the Nasdaq Small
Cap on December 30, 1995 ($9.38) times the corresponding number of shares.
EMPLOYMENT AGREEMENTS
The Company entered into an employment and executive stock agreement with
each of Mr. Shaykin and Drs. Ainsworth, Pilia and Helson, effective as of June
7, 1993 and amended and restated effective as of May 31, 1994. Each Executive
Agreement provides for an initial five-year employment term that expires June
7, 1998 (the "Initial Term") and is renewable each year thereafter (each, a
"Renewal Term") unless either party gives notice of termination to the other
party at least 180 days prior to the commencement of any Renewal Term.
The Executive Agreements provide for annual base salaries for Mr. Shaykin
and Drs. Ainsworth, Pilia and Helson of $150,000, $150,000, $115,000 and
$75,000, respectively. Under the Executive Agreements, the Senior Executives
may be granted annual bonuses at the discretion of the Compensation Committee.
In addition, $59,573 and $43,932 of unpaid salaries deferred between
March 1991 and December 1992 by Drs. Ainsworth and Pilia, respectively, in
light of the Company's financial condition, will be payable at such time, if
ever, as the Company achieves its first annual profit. Mr. Shaykin and Dr.
Helson are part-time employees of the Company, and are not required under
their respective Executive Agreements to spend more than 20 and 15 hours in
any week or 80 and 60 hours per month on the Company's affairs, respectively.
Each Executive Agreement provides for certain benefits if, prior to the end
of the Initial Term or any Renewal Term, a Senior Executive's employment is
terminated either by the Company other than for Cause (as defined in the
Executive Agreements) or by the Senior Executive for Good Reason (as defined
in the Executive Agreements). In general, each Senior Executive would be
entitled to: (i) a continuance of their respective salary and bonus, if any,
through the end of the Initial Term (but in no event for longer than three
years in the case of Mr. Shaykin and Dr. Helson) or the then-current Renewal
Term, if applicable, and (ii) health and welfare benefits as in effect
immediately prior to
56
<PAGE>
termination for a maximum of 18 months following termination. The foregoing
benefits would be limited by the amount deductible for income tax purposes
under the Internal Revenue Code of 1986, as amended.
The Executive Agreements also contain provisions: (i) prohibiting disclosure
of confidential information; (ii) granting to the Company rights to
intellectual property developed by the Senior Executives that relate to the
Company's business or developed in the course of employment with the Company
(or that otherwise relate in any way to health care or pharmaceuticals, in the
case of Drs. Ainsworth and Pilia); and (iii) prohibiting competition with the
Company during and for five years after the Senior Executive's employment.
Under the Executive Agreements, Mr. Shaykin and Drs. Ainsworth, Pilia and
Helson acquired 531,864, 578,592, 150,428 and 265,932 shares of Common Stock,
respectively (the "Executive Stock"). The purchase price for such shares was
$1.50 per share and is represented by promissory notes in favor of the Company
(collectively, the "Executive Notes"). The Executive Notes, which were amended
effective as of May 31, 1994, bear interest at the greater of: (i) the prime
rate minus 1% and (ii) the applicable federal rate (set annually on June 7).
Principal and interest on the Executive Notes are due and payable upon the
receipt of proceeds from a Senior Executive's transfer of any shares of
Executive Stock, in the full amount of such proceeds. Notwithstanding the
foregoing, the outstanding principal amount of, and accrued and unpaid
interest under, an Executive Note shall become immediately due and payable
upon the earliest to occur of: (i) the Sale of the Company (as defined in the
Executive Agreements); (ii) the termination of a Senior Executive's employment
by the Company for Cause (as defined in the Executive Agreement), by the
Senior Executive other than for Good Reason (as defined in the Executive
Agreement), or by reason of a Senior Executive's death, disability or
incapacity; and (iii) the Senior Executive's failure to pay any principal or
interest within 15 days of the date due.
The shares of Common Stock acquired by each Senior Executive were pledged to
the Company pursuant to a pledge agreement (the "Executive Stock Pledge
Agreements") as security for payment of such Senior Executive's Executive
Note. In addition, the Executive Notes provide for recourse against the
respective Senior Executives to the extent of 25% of the then outstanding
principal amount. The Executive Agreements also contain provisions restricting
the transfer of Executive Stock and requiring the Senior Executives to sell
their Executive Stock under certain circumstances if the Board approves a Sale
of the Company (as defined in the Executive Agreements). Commencing May 9,
1995, each Senior Executive became able to repay all or part of the
outstanding principal and/or interest on his or her Executive Note by
remitting to the Company shares of his or her Common Stock, to be valued for
such purposes in an amount equal to the average of the last reported sales
price of the Common Stock for the five trading days prior to remittance
multiplied by the number of shares remitted. During 1995, each of Drs.
Ainsworth, Pilia and Helson remitted 83,987, 21,815 and 38,566 shares of
Common Stock, respectively, to the Company in extinguishment of the debt
represented by their respective Executive Notes. See "Certain Relationships
and Related Transactions--Indebtedness of Management."
The aggregate outstanding principal of and unpaid interest accrued under the
Executive Note for Leonard Shaykin as of June 30, 1996 was $956,221.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Pursuant to the Certificate of Incorporation, no director shall be liable
personally to the Company or its stockholders for monetary damages for breach
of fiduciary duty as a director, provided that the Certificate of
Incorporation does not eliminate the liability of a director for: (i) any
breach of the director's duty of loyalty to the Company or its stockholders;
(ii) acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; (iii) acts or omissions in respect
of certain unlawful dividend payments or stock redemptions or repurchases; or
(iv) any transaction from which such director derives improper personal
benefit. The effect of this provision is to eliminate
57
<PAGE>
the rights of the Company and its stockholders (through stockholders'
derivative suits on behalf of the Company) to recover monetary damages against
a director for breach of the fiduciary duty of care as a director (including
breaches resulting from negligent or grossly negligent behavior) except in the
situations described in clauses (i) through (iv) above. The limitations
summarized above, however, do not affect the ability of the Company or its
stockholders to seek non-monetary remedies, such as an injunction or
rescission, against a director for breach of his fiduciary duty.
In addition, the Certificate of Incorporation provides that the Company
shall indemnify all persons whom it may indemnify pursuant to Section 145 of
the DGCL. Section 145 of the DGCL permits a company to indemnify an officer or
director who was or is a party or is threatened to be made a party to any
proceeding because of his or her position, if the officer or director acted in
good faith and in a manner he or she reasonably believed to be in or not
opposed to the best interests of the Company and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful.
The Company has entered into Director and Officer Indemnification Agreements
with each director and executive officer of the Company pursuant to which the
Company will indemnify each director and executive officer and hold each
director and executive officer harmless to the full extent permitted or
authorized by the DGCL, future Delaware legislation or current or future
judicial or administrative decisions.
58
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
IVAX
In June 1993, the Company entered into the IVAX Agreement which provides for
certain exclusive and non-exclusive rights for IVAX to develop and market NBT
Paclitaxel. The Company continues to supply IVAX with NBT Paclitaxel pursuant
to the terms of the IVAX Agreement. During 1995, sales of NBT Paclitaxel to
IVAX were $589,660 or 22% of the Company's revenues and during the first
quarter of 1996, sales of NBT Paclitaxel to IVAX were $204,770 or 30% of the
Company's revenues during such period. IVAX, through D&N, currently
beneficially owns 11.2% of the Common Stock. Pursuant to the IVAX Agreement,
IVAX may, under limited circumstances, obtain manufacturing information from
the Company, or, under some circumstances, terminate its relationship with the
Company or purchase paclitaxel from third parties if the Company is, among
other things, unable to supply paclitaxel in sufficient quantities to meet its
requirements. See "Risk Factors--Dependence on Strategic Alliances" and
"Business--Strategic Alliances."
Phillip Frost, M.D. and Richard C. Pfenniger, Jr., directors of the Company,
serve as Chairman and Chief Executive Officer of IVAX and Chief Operating
Officer of IVAX, and hold various other executive positions with certain IVAX
subsidiaries. In addition, the Company has been advised that Dr. Frost
beneficially owns approximately 11.8% of IVAX's voting securities.
IVAX, through D&N, Mr. Shaykin, Dr. Ainsworth, Dr. Pilia and the Company are
parties to the Stockholders Agreement pursuant to which, among other things,
each of such directors and IVAX is obligated to vote for the election of Dr.
Ainsworth (as long as he owns beneficially, before taking into consideration
any shares issuable upon exercise or conversion of outstanding options and
warrants or convertible securities, respectively, 10% or more of the
outstanding Common Stock) and two individuals designated by IVAX (as long as
it owns beneficially 5% or more of the outstanding Common Stock and the IVAX
Agreement is not terminated) to the Company's Board of Directors. These
designees currently are Dr. Frost and Mr. Pfenniger. In connection with D&N's
purchase of Company Common Stock in June 1993, the Company granted D&N certain
preemptive rights with respect to subsequent issuances of Common Stock by the
Company. D&N has waived such preemptive rights with respect to the Offering.
See Note 6 of Notes to Financial Statements.
BRIDGE FINANCING
In April 1994, in connection with a bridge financing transaction, Mr.
Shaykin and IVAX, through D&N, each purchased two units (the "Units") from the
Company, each such unit consisting of: (i) 10,000 shares of Common Stock; and
(ii) an unsecured 9% nonnegotiable convertible Bridge Note in the principal
amount of $50,000. The purchase price per Unit was $50,000.
INDEBTEDNESS OF MANAGEMENT
As of June 7, 1993, the Senior Executives executed the Executive Notes in
favor of the Company to represent the amount owed for such Senior Executive's
acquisition of the Executive Stock pursuant to the Executive Agreements. The
Executive Notes, which were amended effective as of May 31, 1994, bear
interest at the greater of: (i) the prime rate minus 1% and (ii) the
applicable federal rate (set annually on June 7). Principal and interest on
the Executive Notes are due and payable upon the receipt of proceeds from a
Senior Executive's transfer of any shares of Executive Stock, in the full
amount of such proceeds. Notwithstanding the foregoing, the outstanding
principal amount of, and accrued and unpaid interest under, an Executive Note
shall become immediately due and payable upon the earliest to occur of: (i)
the Sale of the Company (as defined in the Executive Agreements); (ii) the
termination of a Senior Executive's employment by the Company for Cause (as
defined in the Executive Agreement), by the Senior Executive other than for
Good Reason (as defined in the Executive Agreement), or by reason of a Senior
Executive's death, disability or incapacity; and (iii) the Senior Executive's
failure to pay any principal or interest within 15 days of the date due.
59
<PAGE>
All amounts due under each Executive Note are secured by a pledge, pursuant
to the Executive Stock Pledge Agreement, of all shares of Executive Stock
acquired by the respective Senior Executives under their Executive Agreements.
In addition, the Executive Notes provide for recourse against the respective
Senior Executives to the extent of 25% of the then outstanding principal
amount.
As of May 9, 1995, each Senior Executive was eligible to repay all or part
of the then outstanding principal and/or interest on his or her Executive Note
by remitting to the Company shares of his or her Common Stock, to be valued
for such purposes in an amount equal to the average of the last reported sales
price of the Common Stock for the five trading days prior to remittance
multiplied by the number of shares remitted. On August 14, 1995, Drs.
Ainsworth, Pilia and Helson remitted to the Company 83,907, 21,815 and 38,566
shares of Common Stock, respectively, in full payment of their respective
Executive Notes in the amount of $979,611, $254,688 and $450,247,
respectively.
The aggregate outstanding principal of, and unpaid interest accrued under,
the Executive Note for Leonard Shaykin as of June 30, 1996 was $956,221.
OTHER
Vaughn D. Bryson is Vice Chairman of Vector Securities International, Inc.,
one of the representatives of the Underwriters for the Offering and an
investment banking firm that may perform additional services for the Company
in 1996. Mr. Bryson may also provide consulting services to the Company in the
area of pharmaceutical development in 1996.
The Company and MediScience Associates, Inc. ("MediScience"), entered into a
consulting agreement (the "MediScience Agreement") whereby Dr. Arthur H.
Hayes, who is President and Chief Operating Officer of MediScience, will
provide the Company with consulting services in a variety of areas, including
clinical research planning, strategic positioning and regulatory guidance. The
Company makes quarterly payments to MediScience, under the MediScience
Agreement, of $12,500 for such services. Dr. Hayes is obligated to provide
consulting services under the MediScience Agreement indefinitely, provided
that the MediScience Agreement is terminable by the Company after July 11,
1996 with 90 days' prior notice or by MediScience at any time with 90 days'
prior notice.
In December 1992, the Board of Directors agreed to purchase certain
laboratory and other equipment used in the Company's business from Drs.
Ainsworth and Pilia, the owners of such equipment. To date, the purchase has
not yet occurred. The purchase price for such equipment will be determined by
an independent appraisal, and is not expected to exceed $60,000.
60
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of July 31, 1996
regarding ownership of the Company's voting Common Stock by: (i) persons
believed by the Company to be the beneficial owners of more than 5% of its
outstanding Common Stock; (ii) by each director and Named Executive Officer;
and (iii) by all current directors and executive officers of the Company as a
group. The Company and certain stockholders (representing 50,000 shares of
Common Stock) have granted the Underwriters a 30-day option to purchase up to
an aggregate of 240,000 additional shares of Common Stock on the same terms
and conditions as the Offering to cover over-allotments, if any, in connection
with the Offering. See "Underwriting."
<TABLE>
<CAPTION>
PERCENT
NUMBER OF BENEFICIALLY
COMMON STOCK SHARES OF COMMON OWNED(2)
------------ STOCK -----------------
BENEFICIALLY PRIOR TO AFTER
BENEFICIAL OWNER(1) OWNED(2) OFFERING OFFERING
------------------- ---------------- -------- --------
<S> <C> <C> <C>
5% STOCKHOLDERS:
IVAX Corporation
D&N Holding Company
c/o IVAX Corporation
8800 Northwest 36th Street
Miami, Florida 33178(3)(4)........... 1,126,398 11.2% 9.7%
Knowlton Brothers Inc.
530 Fifth Avenue
New York, New York 10036(5)........... 557,100 5.5 4.8
DIRECTORS AND EXECUTIVE OFFICERS:
Leonard P. Shaykin(3)(6).............. 1,182,742 11.8 10.2
Sterling K. Ainsworth(3)(7)........... 1,108,019 11.0 9.5
Patricia A. Pilia(3)(8)............... 290,079 2.9 2.5
Lawrence Helson(3).................... 221,666 2.2 1.9
E. Garrett Bewkes, Jr.(9)............. 80,167 * *
Gordon H. Link Jr..................... 19,167 * *
Richard C. Pfenniger, Jr.
c/o IVAX Corporation
8800 Northwest 36th Street
Miami, Florida 33178(10)............. 11,000 * *
Phillip Frost
c/o IVAX Corporation
8800 Northwest 36th Street
Miami, Florida 33178 (11)............ 10,000 * *
David L. Denny........................ 300 * *
All directors and executive officers
as a group (13 persons)(12).......... 2,923,140 29.1 25.1
</TABLE>
<TABLE>
<CAPTION>
PREFERRED STOCK
---------------
NUMBER OF
SHARES OF PERCENT
PREFERRED STOCK BENEFICIALLY
BENEFICIAL OWNER BENEFICIALLY OWNED OWNED
---------------- ------------------ ------------
<S> <C> <C>
Mervyn Adelson Trust
c/o Nigro, Karlin & Segal
10100 Santa Monica boulevard
Suite 1300
Los Angeles, CA 90067.................... 125,000 100%
</TABLE>
- --------
*Represents less than 1% of the total.
(1) Unless otherwise noted, all addresses are care of: NaPro BioTherapeutics,
Inc., 6304 Spine Road, Unit A, Boulder, Colorado 80301.
(2) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G filed with the Securities
and Exchange Commission (the "Commission"). Beneficial ownership is
determined in accordance with the rules of the Commission and generally
includes voting or investment power with respect to securities.
61
<PAGE>
Except as indicated by footnotes and subject to community property laws,
where applicable, the persons named above have sole voting and investment
power with respect to all shares of Common Stock shown as beneficially owned
by them. Beneficial ownership also includes shares of stock subject to
options and warrants exercisable or convertible within 60 days.
(3) IVAX, through D&N, Mr. Shaykin and Drs. Ainsworth, Pilia and Helson (the
"Stockholders") and the Company are parties to an amended Stockholders
Agreement (as defined herein) pursuant to which, among other things, each
of the Stockholders is obligated to vote for the election of Dr. Ainsworth
(as long as he owns beneficially (before taking into consideration any
shares issuable upon exercise or conversion of outstanding options and
warrants or convertible securities, respectively) 10% or more of the
outstanding Common Stock) and two individuals designated by IVAX (as long
as it owns beneficially 5% or more of the outstanding Common Stock and the
IVAX Agreement is not terminated) to the Board of Directors. These
designees currently are Dr. Frost and Mr. Pfenniger. By virtue of this
provision of the Stockholders Agreement, each of the Stockholders may be
deemed to share the power to vote or direct the vote of the shares deemed
beneficially owned by the parties to the Stockholders Agreement with each
of the other parties to the Stockholders Agreement. Each of the
Stockholders disclaims that it, he, or she and any one or more other
parties to the Stockholders Agreement constitute a group under Rule 13d-
5(b)(1) of the Exchange Act, pursuant to which such group may be deemed to
beneficially own the shares directly beneficially owned by each of the
Stockholders.
(4) Such shares are held directly by D&N. Mr. Pfenniger is an officer and
director of D&N and Mr. Pfenniger and Dr. Frost are executive officers of
IVAX, and the Company has been advised that Dr. Frost beneficially owns
approximately 12.2% of IVAX's voting securities. Dr. Frost and Mr.
Pfenniger disclaim beneficial ownership of the shares of Common Stock held
by D&N.
(5) Knowlton Brothers, Inc. ("KBI") and a number of related entities, namely,
The Family Partnership, L.P., The Frontier Partnership, L.P., Flagship
Partners, Ltd., Family Partners & Co., Frontier Partners & Co., Knowlton
Brothers, Inc., Knowlton Associates, Inc., Winthrop Knowlton ("WK"),
Stanley Knowlton ("SK"), Christopher Knowlton, Hugh Knowlton Trust For The
Benefit of Erica Knowlton and Margaret F. Knowlton as Custodian for Craig
Stanley Knowlton (KBI and each related entity collectively, the "Reporting
Persons"), own beneficially an aggregate amount of 557,100 shares of
Common Stock (including 125,000 shares that may be acquired upon
conversion of shares of Convertible Preferred Stock of the Company and 600
shares that may be acquired upon exercise of warrants to purchase Common
Stock), constituting approximately 6.5 % of the shares of the Common Stock
outstanding. None of such Reporting Persons individually owns more than
5.0% of the outstanding Common Stock. KBI, WK and SK may be deemed to
beneficially own greater than 5.0% percent of the outstanding Common Stock
based on the relationships among the Reporting Persons. According to a
Schedule 13D filed by the Reporting Persons, the Reporting Persons have
acquired such 557,100 shares of Common Stock solely for investment and the
Reporting Persons have no plans to seek control of the Company.
(6) Does not include 43,333 shares gifted by Mr. Shaykin to certain relatives
and other persons, as to which Mr. Shaykin disclaims beneficial ownership.
Includes warrants to purchase 111,111 shares of Common Stock. Such
warrants were purchased by Mr. Shaykin from D&N.
(7) Includes 122,667 shares of Common Stock issuable upon exercise of non-plan
options granted to Dr. Ainsworth in connection with the formation of the
Company in 1991 and 42,550 shares of Common Stock gifted by Dr. Ainsworth
to relatives and certain other persons which Dr. Ainsworth may be deemed
to beneficially own by virtue of holding powers of attorney to vote and
take certain other actions with respect to such shares. Dr. Ainsworth, who
is engaged to be married to Dr. Pilia, disclaims beneficial ownership of
the shares of Common Stock beneficially owned by Dr. Pilia and the gifted
shares over which Dr. Ainsworth holds powers of attorney. Dr. Ainsworth
has granted the Underwriters a 30-day option to purchase 40,000 shares of
Common Stock on the same terms and conditions as the Offering.
(8) Includes 36,800 shares of Common Stock issuable upon exercise of non-plan
options granted to Dr. Pilia in connection with formation of the Company
in 1991 and 10,800 shares of Common Stock gifted by Dr. Pilia to relatives
and certain other persons which Dr. Pilia may be deemed to beneficially
own by virtue of holding powers of attorney to vote and take certain other
actions with respect to such shares. Dr. Pilia disclaims beneficial
ownership of shares of Common Stock beneficially owned by Dr. Ainsworth
and the gifted shares over which Dr. Pilia holds powers of attorney. See
note (6) above. Dr. Pilia has granted the Underwriters a 30-day option to
purchase 10,000 shares of Common Stock on the same terms and conditions as
the Offering.
(9) Includes an aggregate of 8,500 shares of Common Stock issuable upon
exercise of non-plan options granted to Mr. Bewkes as compensation for
serving on the Board of Directors and as Chairman of and as a member of
the Compensation and Audit Committees thereof, respectively. Includes
5,000 shares subject to options exercisable within 60 days of June 27,
1996.
(10)Represents shares of Common Stock issuable upon exercise of non-plan
options granted to Dr. Frost as compensation for serving on the Board of
Directors. Includes 5,000 shares subject to options exercisable within 60
days of June 27, 1996.
(11)Represents shares of Common Stock issuable upon exercise of non-plan
options granted to Mr. Pfenniger as compensation for serving on the Board
of Directors and the compensation committee thereof. Includes 5,000
shares subject to options exercisable within 60 days of June 27, 1996.
(12)Includes an aggregate of 723,912 shares of Common Stock issuable upon
exercise of warrants, non-plan options and options granted under the 1993
Stock Option Plan and 1994 Plan.
62
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 19,000,000 shares of
Common Stock, $.0075 par value per share, 1,000,000 shares of nonvoting common
stock, $.0075 par value per share ("Nonvoting Common Stock") and 2,000,000
shares of preferred stock, $.001 par value per share (the "Preferred Stock").
As of July 31, 1996, there were 10,041,117 shares of Common Stock, 395,000
shares of Nonvoting Common Stock and 125,000 shares of Preferred Stock
outstanding. As of July 31, 1996, the Common Stock was held of record by
approximately 150 stockholders.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders, including the election of
directors. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election if they choose to do so. The Certificate of
Incorporation does not provide for cumulative voting for the election of
directors. Holders of Common Stock will be entitled to receive ratably such
dividends, if any, as may be declared from time to time by the Board of
Directors out of legally available funds, and will be entitled to receive, pro
rata, all assets of the Company available for distribution to such holders
upon liquidation. Holders of Common Stock have no preemptive, subscription or
redemption rights. All outstanding shares of Common Stock are, and the Common
Stock offered hereby, upon issuance and sale, will be, fully paid and
nonassessable.
NONVOTING COMMON STOCK; WARRANTS TO PURCHASE NONVOTING COMMON STOCK
The Company has issued to Faulding 400,000 shares of Nonvoting Common Stock,
as well as the 400,000 Faulding Warrants which are exercisable to purchase an
additional 400,000 shares of Nonvoting Common Stock. The Faulding Warrants
have an exercise price of $5.00 per share and expire on January 31, 1998. The
Nonvoting Common Stock generally is identical in all respects to the Common
Stock. The holders of Nonvoting Common Stock, however, have no right to vote
on any matters to be voted on by the Company's stockholders except that such
holders have the right in certain cases, to vote as a separate class on any
merger or consolidation of the Company with or into another entity or
entities, or any recapitalization or reorganization, in which shares of
Nonvoting Common Stock would receive or be exchanged for consideration
different on a per share basis from the consideration received with respect to
or in exchange for shares of Common Stock or would otherwise be treated
differently from shares of Common Stock. Each share of Nonvoting Common Stock
will be converted into one share of Common Stock upon any disposition or other
transfer thereof by Faulding.
COMPANY PREFERRED STOCK; NAPRO CANADA PREFERRED STOCK
Pursuant to the Certificate of Incorporation, the Company is authorized to
issue "blank check" preferred stock, which may be issued from time to time in
one or more series upon authorization by the Board of Directors. The Board of
Directors, without further approval of the stockholders, is authorized to fix
the dividend rights and terms, conversion rights, voting rights, redemption
rights and terms, liquidation preferences, and any other rights, preferences,
privileges and restrictions applicable to each series of preferred stock. The
issuance of preferred stock, while providing flexibility in connection with
possible acquisitions and other corporate purposes could, among other things,
adversely affect the voting power of the holders of Common Stock and, under
certain circumstances, make it more difficult for a third party to rapidly
gain control of the Company, discourage bids for the Common Stock at an
insufficient premium or otherwise adversely affect the market price of the
Common Stock.
63
<PAGE>
In July 1995, the Company closed a private placement of 638,750 shares of
Convertible Preferred Stock, Series A (the "U.S. Preferred") of the Company,
for proceeds of $5,114,111. In July and August 1995, the Company's Canadian
subsidiary NaPro Canada closed a private placement of 725,513 shares of
Convertible Preferred Stock, Series A (the "Canadian Preferred") for proceeds
of $5,959,060.
The U.S. Preferred has a liquidation preference of $8.00 per share and is
immediately convertible into Common Stock on a share-for-share basis at the
option of the holder. The U.S. Preferred may be redeemed by the Company at its
liquidation value beginning one year after issuance if the average trading
price for the Common Stock over a 20-trading day period has equaled or
exceeded $16.00 and beginning three years after issuance if such trading price
has equaled or exceeded $10.00. Holders may elect to convert their U.S.
Preferred into Common Stock at any time prior to 15 business days before the
date fixed for redemption. The U.S. Preferred also may be redeemed at any time
after September 30, 2000 at the option of the holder. The Company may elect to
pay the redemption price by issuing Common Stock valued at 95.0% of its then
market price. The U.S. Preferred has one vote per share.
The Canadian Preferred has a liquidation preference of CDN$11.00 ($8.00 U.S.
as of July 29, 1996) per share and may be exchanged for Common Stock on a
share-for-share basis at any time after December 1, 1995. The Company has the
option to acquire the Canadian Preferred at its liquidation value beginning
one year after issuance if the average trading price for Common Stock over a
20-trading day period has equaled or exceeded the equivalent of CDN$22.00 and
beginning three years after issuance if such trading price has equaled or
exceeded the equivalent of CDN$13.75. Holders may elect to exchange their
Canadian Preferred for Common Stock to acquire the shares under the foregoing
option. Holders have the option to require the Company to purchase the
Canadian Preferred for its liquidation preference at any time after September
30, 2000. The Company may elect to pay the purchase price of the Canadian
Preferred by issuing Common Stock valued at 95.0% of its then market price.
The Canadian Preferred is entitled to one vote per share on matters submitted
to the stockholders of NaPro Canada.
As of July 31, 1996, a total of 513,750 shares of the U.S. Preferred had
converted into 513,750 shares of Common Stock and 266,421 shares of the
Canadian Preferred had been exchanged for 266,421 shares of Common Stock.
The Company registered under the Securities Act the resale of shares of
Common Stock issued upon conversion of the U.S. Preferred or exchange of the
Canadian Preferred. Neither the U.S. Preferred nor the Canadian Preferred has
any dividend requirement.
REDEEMABLE WARRANTS
The Company called for redemption all of the Redeemable Warrants. Each
holder of Redeemable Warrants had the right to elect one, the Cash Exercise or
the Cash-less Exercise or a combination of both. No holder of Redeemable
Warrants was obligated to exercise Redeemable Warrants. The holders of
Warrants for the purchase of 660 shares of Common Stock did not choose Cash
Exercise or Cash-less Exercise prior to the Warrant Redemption Date, and such
holder's Redeemable Warrants were redeemed by the Company at $0.10 per
Redeemable Warrant. No fractional shares were issued as a result of the Cash-
less Exercise. Pursuant to the Redemption, 630,620 Redeemable Warrants were
exercised pursuant to Cash Exercise elections resulting in $3,073,100 (net of
offering costs of $80,000) of proceeds to the Company and the issuance of
630,620 shares of Common Stock and 1,438,720 Redeemable Warrants were
exercised pursuant to Cash-less Exercise elections resulting in the issuance
of 1,007,102 shares of Common Stock. See "Capitalization" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Recent Developments."
OTHER WARRANTS
As of June 30, 1996, the Company had granted warrants to purchase a total of
177,779 shares of Common Stock at exercise prices ranging from $.07 to $1.88
per share.
64
<PAGE>
PREEMPTIVE RIGHTS
The Company granted D&N certain preemptive rights with respect to subsequent
issuances of Common Stock by the Company. D&N has waived such preemptive
rights with respect to the Offering. See "Certain Relationships and Related
Transactions."
CERTAIN CERTIFICATE OF INCORPORATION, BYLAW AND STATUTORY PROVISIONS AFFECTING
STOCKHOLDERS
Stockholder Action by Written Consent. The Certificate of Incorporation
requires that any action required or permitted to be taken by the Company's
stockholders must be effected at a duly called annual or special meeting of
stockholders and may not be effected by consent in writing.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The Bylaws provide that stockholders seeking to bring business
before or to nominate directors at any meeting of stockholders must provide
timely notice thereof in writing. To be timely, a stockholder's notice must be
delivered to, or mailed and received at, the principal executive offices of
the Company not less than 50 days nor more than 75 days prior to such meeting
or, if less than 60 days' notice was given for the meeting, within 10 days
following the date on which such notice was given. The Bylaws also specify
certain requirements for a stockholder's notice to be in proper written form.
These provisions may preclude some stockholders from bringing matters before
the stockholders or from making nominations for directors.
Section 203 of Delaware Corporation Law. The Company is subject to the
"business combination" statute of the DGCL. In general, such statute prohibits
a publicly held Delaware corporation from engaging in various "business
combination" transactions with any "interested stockholder" for a period of
three years after the date of the transaction in which the person became an
"interested stockholder," unless (i) the transaction in which the interested
stockholder obtained such status or the business combination is approved by
the Board of Directors prior to the date the interested stockholder obtained
such status, (ii) upon consummation of the transaction which resulted in the
stockholder becoming an "interested stockholder," the "interested stockholder"
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned by (a) persons who are
directors and also officers and (b) employee stock plans in which employee
participants do not have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer, or
(iii) on or subsequent to such date the "business combination" is approved by
the Board of Directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least 66 2/3% of the outstanding
voting stock which is not owned by the "interested stockholder." A "business
combination" includes mergers, asset sales and other transactions resulting in
financial benefit to a stockholder. An "interested stockholder" is a person
who, together with affiliates and associates, owns (or within three years, did
own) 15% or more of a corporation's voting stock.
Rights Plan. The Company is considering the adoption of a Rights Plan,
which, if adopted by the Board of Directors, would not require stockholder
approval. The Rights Plan would have both a "flip-in" and "flip-over"
provision. Existing stockholders as of a selected record date would receive
one Right for each share of Common Stock held. For the "flip-in" provision,
the Rights would become exercisable only if a person or group acquires
beneficial ownership of the Threshold Percentage. In that event, all holders
of Rights other than the person or group who acquired the Threshold Percentage
would be entitled to purchase shares of Common Stock at a substantial discount
to the then current market price. For the "flip-over" provision, if the
Company was acquired in a merger or other business combination or transaction,
the holders of such Rights would be entitled to purchase shares of the
acquiror's common stock at a substantial discount.
Classification of the Board of Directors. The Certificate of Incorporation,
as amended, and bylaws will provide for a classified Board of Directors
consisting of three classes of directors serving staggered
65
<PAGE>
terms. The Company's directors may be removed only for cause by stockholders
holding not less than 80% of the shares entitled to elect the director or
directors whose removal is sought.
The foregoing provisions of Delaware law, the Company's Certificate of
Incorporation and By-laws, as well as the Rights Plan, could have the effect
of discouraging others from attempting hostile takeovers of the Company and,
as a consequence, they may also inhibit temporary fluctuations in the market
price of the Common Stock that might result from actual or rumored hostile
takeover attempts. Such provisions may also have the effect of preventing
changes in the management of the Company. It is possible that such provisions
could make it more difficult to accomplish transactions which stockholders may
otherwise deem to be in their best interests.
TRANSFER AGENT AND WARRANT AGENT
The transfer agent for the Common Stock and the warrant agent for the
Redeemable Warrants is American Stock Transfer and Trust Company, 40 Wall
Street, New York, New York 10005.
REGISTRATION RIGHTS
The Company is a party to a Registration Agreement dated as of June 7, 1993
(the "Registration Agreement") pursuant to which IVAX and the Senior
Executives were granted certain rights with respect to registration under the
Securities Act of an aggregate of approximately 3,543,000 shares of Common
Stock then beneficially held by such holders plus any shares of Common Stock
such holders thereafter acquired (collectively, the "Registrable Securities").
Under the Registration Agreement, IVAX may demand, at the Company's expense,
one underwritten registration by the Company of all or part of IVAX's
Registrable Securities (a total of 1,126,398 shares), subject to certain
limitations. In addition, whenever the Company proposes to register any of its
securities under the Securities Act (other than pursuant to a demand
registration by IVAX), IVAX and each Senior Executive may require the Company,
subject to certain limitations, to include all or any portion of their
Registrable Securities in such registration at the Company's expense.
Kirkland & Ellis, special counsel to the Company, holds warrants to purchase
20,000 shares of Common Stock. Pursuant to a registration agreement dated as
of May 31, 1994 between the Company and Kirkland & Ellis, Kirkland & Ellis may
require the Company, subject to certain limitations, to register all or any
portion of its registrable securities at the Company's expense when the
Company proposes to register any of its securities under the Securities Act.
In connection with the IPO, the Company granted to Whale Securities certain
demand and piggyback registration rights in connection with the 360,000 shares
of Common Stock issuable upon exercise of the Whale Warrants and the warrants
included therein. The Company has agreed to pay in most circumstances
substantially all expenses in connection with the foregoing registration
rights. The shares issuable upon exercise of the Whale Warrants are currently
registered for sale under the Securities Act. Holders of Whale Securities have
agreed not to sell their Whale Warrants and underlying Common Stock (excluding
22,890 Whale Warrants and 22,890 shares of Common Stock underlying the Whale
Warrants) during the Lock-Up Period.
66
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters") for whom Vector Securities
International, Inc. and J.P. Morgan Securities Inc. are acting as
representatives (the "Representatives"), have severally agreed to purchase,
subject to the terms and conditions of the Underwriting Agreement, and the
Company has agreed to sell to the Underwriters, the following respective
number of shares of Common Stock.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Vector Securities International, Inc. ............................. 532,500
J.P. Morgan Securities Inc. ....................................... 532,500
BT Securities Corporation.......................................... 35,000
CS First Boston Corporation........................................ 35,000
A.G. Edwards & Sons, Inc. ......................................... 35,000
Lehman Brothers Inc. .............................................. 35,000
PaineWebber Incorporated........................................... 35,000
Salomon Brothers Inc .............................................. 35,000
UBS Securities LLC................................................. 35,000
Allen & Company Incorporated....................................... 35,000
Cowen & Company.................................................... 15,000
Crowell, Weedon & Co. ............................................. 15,000
Cruttendon Roth Incorporated....................................... 15,000
Everen Securities, Inc............................................. 15,000
Genesis Merchant Group Securities.................................. 15,000
Gerard Klauer Mattison & Co., LLC.................................. 15,000
Hanifen, Imhoff Inc. .............................................. 15,000
Jefferies & Company................................................ 15,000
Ladenburg, Thalmann & Co., Inc. ................................... 15,000
Legg Mason Wood Walker, Incorporated............................... 15,000
McDonald & Company Securities, Inc. ............................... 15,000
Mesirow Financial, Inc. ........................................... 15,000
Nesbitt Burns Securities Inc. ..................................... 15,000
Rauscher Pierce Refsnes, Inc. ..................................... 15,000
Starr Securities, Inc. ............................................ 15,000
Sutro & Co. Incorporated .......................................... 15,000
Van Kasper & Company............................................... 15,000
---------
Total............................................................ 1,600,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel. The
nature of the Underwriters' obligation is such that they are committed to
purchase all shares of Common Stock offered hereby if any of such shares are
purchased. The Underwriting Agreement contains certain provisions whereby if
any Underwriter defaults in its obligation to purchase shares, and the
aggregate obligations of the Underwriters so defaulting, do not exceed 10% of
the shares offered hereby, the remaining Underwriters, or some of them, must
assume such obligations.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the public offering price set forth on the cover page of this
Prospectus, and to certain dealers at such price less a concession not in
excess of $.35 per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $.10 per share to certain other
dealers. After the public offering of the shares of Common Stock, the offering
price and other selling terms may be changed by the Representatives.
67
<PAGE>
The Company and certain stockholders (representing 50,000 shares of Common
Stock) have granted to the Underwriters an option, exercisable at any time
during the 30-day period after the date of this Prospectus, to purchase up to
an aggregate of 300,000 additional shares of Common Stock at the public
offering price set forth on the cover page of this Prospectus, less
underwriting discounts and commissions. The Underwriters may exercise such
option solely for the purpose of covering over-allotments, if any, in
connection with the Offering. To the extent such option is exercised, each of
the Underwriters will be obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number of
shares of Common Stock set forth next to such Underwriter's name in the
preceding table bears to the total number of shares listed in the table.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of this Offering without notice. The Underwriters reserve the
right to reject an order for the purchase of shares in whole or in part.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
The executive officers, directors and certain stockholders of the Company
have agreed, subject to certain exceptions relating to pledged shares, that
they will not, without the prior written consent of Vector Securities
International, Inc., offer, sell, or otherwise dispose of any shares of Common
Stock, options or warrants to acquire shares of Common Stock or securities
exchangeable for or convertible into shares of Common Stock owned by them for
a period of 90 days after the date of this Prospectus (October 25, 1996 in the
case of Faulding). The Company has agreed that it will not, without the prior
written consent of Vector Securities International, Inc., offer, sell, or
otherwise dispose of any shares of Common Stock, options or warrants to
acquire shares of Common Stock or securities exchangeable for or convertible
into shares of Common Stock for a period of 90 days after the date of this
Prospectus, except that the Company may grant additional options under its
stock option plans, or issue shares upon the exercise of outstanding stock
options or warrants. Vaughn D. Bryson, the Vice Chairman of Vector Securities
International, Inc., is a director of the Company. See "Risk Factors--Shares
Eligible for Future Sale; Registration Rights."
68
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock will be passed upon for the
Company by Kirkland & Ellis, 153 East 53rd Street, New York, New York, special
counsel for the Company. Certain legal matters relating to the Offering will
be passed upon for the Underwriters by Skadden, Arps, Slate, Meagher & Flom,
333 West Wacker Drive, Chicago, Illinois. Kirkland & Ellis holds warrants to
purchase 20,000 shares of Common Stock. In addition, two partners of Kirkland
& Ellis hold in the aggregate 3,868 shares of Common Stock.
EXPERTS
The consolidated financial statements of the Company at December 31, 1995
and 1994, and for each of the three years in the period ended December 31,
1995 included in this Prospectus have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report, given upon the
authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement under the
Securities Act with respect to the Common Stock offered by this Prospectus.
This Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information with
respect to the Company and this offering, reference is made to the
Registration Statement, including the exhibits filed therewith, which may be
inspected without charge at the Commission's principal office at 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of the Registration Statement may
be obtained from the Commission at its principal office upon payment of
prescribed fees. Statements contained in this Prospectus as to the contents of
any contract or other document are not necessarily complete and, where the
contract or other document has been filed as an exhibit to the Registration
Statement, each such statement is qualified in all respects by reference to
the applicable document filed with the Commission.
The Company is subject to the reporting requirements of the Exchange Act and
in accordance therewith files reports, proxy statements and other information
with the Commission. Such reports, proxy statements and other information can
be inspected and copied at the public reference facilities of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549; at its New York Regional
Office, 7 World Trade Center, New York, New York 10048; and at its Chicago
Regional Office, 500 West Madison Street, Chicago, Illinois 60661-2511, and
copies of such material can be obtained from the Commission's Public Reference
Section at prescribed rates. The Commission maintains a web site that contains
reports, proxy and information statements and other information. The web site
address is http://www.sec.gov. The Company intends to furnish its stockholders
with annual reports containing audited financial statements and such other
periodic reports as the Company deems appropriate or as may be required by
law.
69
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................... F-2
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Operations....................................... F-5
Consolidated Statements of Stockholders' Equity............................. F-6
Consolidated Statements of Cash Flows....................................... F-7
Notes to Consolidated Financial Statements.................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
NaPro BioTherapeutics, Inc.
We have audited the accompanying consolidated balance sheets of NaPro
BioTherapeutics, Inc. and subsidiary as of December 31, 1994 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of NaPro
BioTherapeutics, Inc. and subsidiary at December 31, 1994 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Denver, Colorado
January 26, 1996
F-2
<PAGE>
NAPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------- -----------
1994 1995 1996
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................. $ 892,146 $ 7,133,390 $ 4,922,895
Securities available for sale............. 507,752 -- --
Securities held to maturity............... -- 667,000 667,000
Accounts receivable....................... 148,347 325,814 459,700
Inventory:
Raw materials............................ 499,966 286,617 819,918
Work-in-process.......................... 380,545 432,898 289,066
Finished goods........................... 547,265 492,444 338,565
---------- ----------- -----------
1,427,776 1,211,959 1,447,549
Prepaid expenses and other................ 859,539 310,451 329,239
---------- ----------- -----------
Total current assets........................ 3,835,560 9,648,614 7,826,383
Property and equipment, at cost (Note 4):
Laboratory equipment...................... 1,093,960 1,312,996 1,359,320
Leasehold improvements.................... 248,729 507,816 495,065
Office equipment and other................ 113,485 275,902 343,074
Construction in progress.................. 122,504 406,948 428,171
---------- ----------- -----------
1,578,678 2,503,662 2,625,630
Accumulated depreciation.................. 524,578 721,498 824,596
---------- ----------- -----------
Property and equipment, net................. 1,054,100 1,782,164 1,801,034
Restricted cash............................. -- 123,750 177,399
Receivable from related parties............. 18,487 18,487 24,738
Other assets................................ 67,805 380,335 376,383
---------- ----------- -----------
Total assets................................ $4,975,952 $11,953,350 $10,205,937
========== =========== ===========
</TABLE>
F-3
<PAGE>
NAPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS--(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, MARCH 31, EQUITY
-------------------------- ------------ AS OF MARCH 31,
1994 1995 1996 1996
------------ ------------ ------------ ---------------
(NOTE 6)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable...... $ 417,374 $ 662,726 $ 625,958
Accrued payroll and
payroll taxes........ 112,607 338,032 328,283
Capital lease obliga-
tions, current (Note
4)................... 16,985 105,454 94,753
Notes payable, current
(Note 3)............. 83,443 38,801 46,488
Deferred revenue...... 36,000 51,431 --
------------ ------------ ------------
Total current liabili-
ties................... 666,409 1,196,444 1,095,482
Capital lease obliga-
tions, long term (Note
4)..................... 3,471 298,811 411,352
Notes payable, long term
(Note 3)............... -- 1,150,000 1,158,333
Deferred revenue (Notes
3 and 8)............... 1,100,000 -- --
Compensation due to of-
ficers and directors... 169,358 169,358 169,358
Commitments and contin-
gencies (Notes 1 and 9)
Minority interest....... -- 3,715,139 3,715,139
Stockholders' equity
(Note 6):
Series A preferred
stock, $.001 par val-
ue;
2,000,000 shares au-
thorized;
None issued and
outstanding shares
in 1994 and 125,000
shares issued and
outstanding in 1995
and 1996 (unaudited)
(preference in
liquidation
$1,000,000)......... -- 125 125 $ 125
Nonvoting common
stock, convertible on
disposition into
400,000 shares of
Common Stock, $.0075
par value; 1,000,000
shares authorized;
400,000 shares issued
and outstanding...... 3,000 3,000 3,000 3,000
Common Stock, $.0075
par value;
19,000,000 shares au-
thorized;
7,713,443 shares is-
sued in 1994,
8,525,265 shares is-
sued in 1995,
8,529,932 shares is-
sued in 1996 (unau-
dited) and
10,167,654 shares
pro forma (unau-
dited).............. 57,851 63,939 63,973 76,257
Additional paid-in
capital.............. 20,123,991 26,675,099 26,681,313 29,742,129
Unearned compensation. (29,685) (9,426) (7,356) (7,356)
Notes receivable from
stockholders......... (2,488,996) (924,789) (940,694) (940,694)
Deficit............... (14,629,447) (18,699,803) (20,459,541) (20,459,541)
Treasury stock--none
in 1994 and 144,288
in 1995 and 1996
(unaudited).......... -- (1,684,547) (1,684,547) (1,684,547)
------------ ------------ ------------ ------------
Total stockholders' eq-
uity................... 3,036,714 5,423,598 3,656,273 $ 6,729,373
------------ ------------ ------------ ============
Total liabilities and
stockholders' equity... $ 4,975,952 $ 11,953,350 $ 10,205,937
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
NAPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------- -----------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Sales of products..... $ 1,247,819 $ 1,002,037 $ 2,623,426 $1,148,181 $ 690,830
Other................. 567 5,176 -- -- --
----------- ----------- ----------- ---------- -----------
1,248,386 1,007,213 2,623,426 1,148,181 690,830
Expenses:
Research, development
and cost of products
sold................. 3,505,465 2,706,767 4,325,274 1,074,669 1,786,137
General and adminis-
trative.............. 2,689,803 2,043,931 2,309,934 450,803 703,513
Faulding royalty (Note
6)................... -- 1,000,000 -- -- --
Plantation fees (Note
8)................... 6,976 1,238,256 272,052 268,720 --
----------- ----------- ----------- ---------- -----------
6,202,244 6,988,954 6,907,260 1,794,192 2,489,650
----------- ----------- ----------- ---------- -----------
Operating loss.......... (4,953,858) (5,981,741) (4,283,834) (646,011) (1,798,820)
Other income (expense):
Interest income....... 79,326 188,026 373,306 49,126 100,135
Interest and other ex-
pense................ (33,839) (339,830) (159,828) (40,059) (61,053)
----------- ----------- ----------- ---------- -----------
Loss before extraordi-
nary item.............. (4,908,371) (6,133,545) (4,070,356) (636,944) (1,759,738)
Loss on early
extinguishment of
debt (Note 6).......... -- (512,482) -- -- --
----------- ----------- ----------- ---------- -----------
Net loss................ $(4,908,371) $(6,646,027) $(4,070,356) $ (636,944) $(1,759,738)
=========== =========== =========== ========== ===========
Loss per share:
Before extraordinary
item................. $ (0.79) $ (0.91) $ (0.51) $ (0.08) $ (0.21)
Extraordinary item.... -- (0.08) -- -- --
----------- ----------- ----------- ---------- -----------
Net loss.............. $ (0.79) $ (0.99) $ (0.51) $ (0.08) $ (0.21)
=========== =========== =========== ========== ===========
Weighted average shares
outstanding............ 6,201,219 6,761,081 7,972,537 7,713,443 8,527,620
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
NAPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
SERIES A NONVOTING ADDITIONAL UNEARNED RECEIVABLE
PREFERRED COMMON COMMON PAID-IN COMPENSA- FROM TREASURY
STOCK STOCK STOCK CAPITAL TION STOCKHOLDERS DEFICIT STOCK TOTAL
--------- --------- ------- ----------- ---------- ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31,
1992............ $ -- $ -- $22,034 $ 2,913,881 $ (51,000) $ -- $ (3,075,049) $ -- $ (190,134)
Issuance of
1,124,398
shares of
common stock at
$2.47 to $5.265
per share and
113,778
warrants for
cash........... -- -- 8,433 3,096,252 -- -- -- -- 3,104,685
Issuance of
1,526,814
shares of
common stock at
$2.47 per share
to officers in
exchange for
notes, unearned
compensation
and cash....... -- -- 11,451 3,755,964 (1,477,203) (2,355,837) -- -- (65,625)
Grant of
employee stock
options........ -- -- -- 114,042 (85,417) -- -- -- 28,625
Issuance of
warrant to
purchase 20,000
shares of
common stock in
exchange for
legal services. -- -- -- 53,950 -- -- -- -- 53,950
Issuance of
warrant to
purchase 13,333
shares of
common stock in
exchange for
employment
services....... -- -- -- 7,900 -- -- -- -- 7,900
Amortization of
unearned
compensation... -- -- -- -- 1,025,003 -- -- -- 1,025,003
Net loss........ -- -- -- -- -- -- (4,908,371) -- (4,908,371)
----- ------ ------- ----------- ---------- ---------- ------------ ----------- ----------
Balance at
December 31,
1993............ -- -- 41,918 9,941,989 (588,617) (2,355,837) (7,983,420) -- (943,967)
Issuance of
265,000 shares
of common stock
at $2.40 per
share in
exchange for
cash, net of
offering costs
of $87,022..... -- -- 1,988 546,991 -- -- -- -- 548,979
Issuance of
16,667 common
stock warrants
at $.01 per
share in
exchange for
consulting
services....... -- -- -- 42,500 -- -- -- -- 42,500
Issuance of
33,333 common
stock warrants
at $1.125 per
share in
exchange for
employment
services....... -- -- -- 39,834 -- -- -- -- 39,834
Issuance of
1,800,000
shares of
common stock at
$5.00 per share
and 2,070,000
warrants at
$0.10 per
warrant for
cash, net of
offering costs
of $1,184,418.. -- -- 13,500 7,339,082 -- -- -- -- 7,352,582
Issuance of
400,000 shares
of nonvoting
common stock at
$5.00 per share
for cash and
warrants to
purchase
400,000 shares
of nonvoting
common stock at
$.10 per
warrant........ -- 3,000 -- 2,037,000 -- -- -- -- 2,040,000
Exercise of
30,667 common
stock warrants
for cash, at
prices ranging
from $.10 to
$2.40 per
share.......... -- -- 230 33,735 -- -- -- -- 33,965
Issuance of
28,615 shares
of common stock
at $5.00 per
share in
exchange for
notes payable.. -- -- 215 142,860 -- -- -- -- 143,075
Amortization of
unearned
compensation... -- -- -- -- 558,932 -- -- -- 558,932
Interest
receivable on
officers'
notes.......... -- -- -- -- -- (133,159) -- -- (133,159)
Net loss........ -- -- -- -- -- -- (6,646,027) -- (6,646,027)
----- ------ ------- ----------- ---------- ---------- ------------ ----------- ----------
Balance at
December 31,
1994............ -- 3,000 57,851 20,123,991 (29,685) (2,488,996) (14,629,447) -- 3,036,714
Issuance of
1,364,263
shares of
preferred stock
at $8.00 per
share, net of
offering costs
of $846,421
(725,513 shares
in minority
interest)...... 639 -- -- 4,267,051 -- -- -- -- 4,267,690
Conversion of
513,750 shares
of preferred
stock into
513,750 shares
of common stock
and exchange of
266,421 shares
of subsidiary's
preferred stock
for 266,421
shares of
common stock... (514) -- 5,851 2,238,584 -- -- -- -- 2,243,921
Exercise of
31,651 stock
options at
prices ranging
from $.75 per
share to $2.40
per share...... -- -- 237 45,473 -- -- -- -- 45,710
Repurchase of
144,288 shares
of common stock
at $11.675 per
share in
exchange for
cancellation of
indebtedness... -- -- -- -- -- 1,684,547 -- (1,684,547) --
Interest
receivable on
officers'
notes.......... -- -- -- -- -- (120,340) -- -- (120,340)
Amortization of
unearned
compensation... -- -- -- -- 20,259 -- -- -- 20,259
Net loss........ (4,070,356) (4,070,356)
----- ------ ------- ----------- ---------- ---------- ------------ ----------- ----------
Balances at
December 31,
1995............ 125 3,000 63,939 26,675,099 (9,426) (924,789) (18,699,803) (1,684,547) 5,423,598
Exercise of
4,667 stock
options at
prices ranging
from $.75 per
share to $2.40
per share
(unaudited).... -- -- 34 6,214 -- -- -- -- 6,248
Interest
receivable on
officers' notes
(unaudited).... -- -- -- -- -- (15,905) -- -- (15,905)
Amortization of
unearned
compensation
(unaudited).... -- -- -- -- 2,070 -- -- -- 2,070
Net loss
(unaudited).... -- -- -- -- -- -- (1,759,738) -- (1,759,738)
----- ------ ------- ----------- ---------- ---------- ------------ ----------- ----------
Balances at March
31, 1996
(unaudited)..... $ 125 $3,000 $63,973 $26,681,313 $ (7,356) $ (940,694) $(20,459,541) $(1,684,547) $3,656,273
===== ====== ======= =========== ========== ========== ============ =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
NAPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------- -----------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ---------- -----------
OPERATING ACTIVITIES (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss................ $(4,908,371) $(6,646,027) $(4,070,356) $ (636,944) $(1,759,738)
Adjustments to reconcile
net loss to net cash
used by operating
activities:
Depreciation and
amortization......... 179,453 473,989 269,804 83,945 115,769
Employee termination
expense.............. -- 82,334 -- -- --
Compensation for
common stock and
options.............. 1,025,003 555,497 20,259 5,296 2,070
Loss on disposal of
property and
equipment............ 4,298 335,021 174,440 -- 15,249
Loss on early
extinguishment of
debt................. -- 512,482 -- -- --
Gain on foreign
currency
transactions......... -- -- (11,026) -- --
Changes in operating
assets and
liabilities:
Accounts receivable.. (234,323) 114,679 (177,467) (1,273,181) (133,886)
Inventory............ (552,642) (705,771) 215,817 291,790 (235,590)
Prepaid expenses and
other current
assets.............. (27,725) (887,314) 116,218 647,624 (24,419)
Accounts payable..... 852,492 (735,613) 245,352 56,280 (52,199)
Accrued liabilities.. 55,980 (48,366) 225,425 19,845 (25,654)
Deferred revenue..... 336,600 (300,598) 15,431 (468,816) (36,000)
----------- ----------- ----------- ---------- -----------
Net cash used by
operating activities... (3,269,235) (7,249,687) (2,976,103) (1,274,161) (2,134,398)
INVESTING ACTIVITIES
Additions to property
and equipment.......... (527,446) (575,156) (1,209,326) (145,343) (138,221)
Purchase of securities.. -- (2,932,260) (6,562,600) -- --
Proceeds from sale or
maturity of securities. -- 2,435,942 6,451,146 503,450 --
Transfer of restricted
cash................... -- -- (123,750) -- (53,649)
Proceeds from sale of
property and equipment. -- 2,200 250 -- --
----------- ----------- ----------- ---------- -----------
Net cash used by
investing activities... (527,446) (1,069,274) (1,444,280) 358,107 (191,870)
FINANCING ACTIVITIES
Increase in deferred
revenue-long term...... 349,998 350,000 -- -- --
Proceeds from notes
payable................ 400,000 1,571,569 171,198 556,567 46,488
Payments under notes
payable................ (126,808) (2,154,590) (165,840) (57,777) (38,801)
Proceeds from sales-type
lease.................. -- -- 469,094 -- 160,947
Payments under capital
leases................. -- -- (85,285) -- (59,109)
Proceeds from sale of
common and preferred
stock.................. 3,104,685 10,697,987 5,155,710 -- 6,248
Proceeds from sale of
preferred stock by
subsidiary............. -- -- 5,959,060 -- --
Offering costs.......... -- (1,271,440) (842,310) -- --
----------- ----------- ----------- ---------- -----------
Net cash provided by
financing activities... 3,727,875 9,193,526 10,661,627 498,790 115,773
----------- ----------- ----------- ---------- -----------
Net increase (decrease)
in cash and cash
equivalents............ (68,806) 874,565 6,241,244 (417,264) (2,210,495)
Cash and cash
equivalents at
beginning of year...... 86,387 17,581 892,146 892,146 7,133,390
----------- ----------- ----------- ---------- -----------
Cash and cash
equivalents at end of
year................... $ 17,581 $ 892,146 $ 7,133,390 $ 474,882 $ 4,922,895
=========== =========== =========== ========== ===========
SUPPLEMENTAL SCHEDULE OF
NONCASH INVESTING AND
FINANCING ACTIVITIES
Issuance of common stock
and granting of common
stock options, unearned
compensation........... $ 1,653,095 $ -- $ -- $ -- $ --
Notes and related
interest receivable
from stockholders...... 2,355,837 133,158 120,356 35,278 15,905
Repayment of notes
receivable from
stockholders through
transfer of treasury
stock to the Company... -- -- 1,684,547 -- --
Conversion of deferred
revenue to long-term
debt................... -- -- 1,100,000 -- --
Conversion of preferred
shares of subsidiary to
common shares of
Parent................. -- -- 2,243,921 -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
NAPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
1.BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
NaPro BioTherapeutics, Inc. (the "Company") was originally incorporated in
1991 as a Washington corporation. On September 8, 1993, the Company merged
into a wholly-owned subsidiary, a Delaware corporation, and increased its
authorized capital stock to 130,000,000 shares of $.001 par value common
stock and 10,000,000 shares of $.001 par value nonvoting preferred stock.
On March 16, 1994, the Company effected a 1-for-7.5 reverse stock split by
exchanging each 7.5 shares of common stock for 1 share of $.0075 par value
common stock, and adjusted its authorized capital stock to 20,000,000
shares of $.0075 par value common stock, and 2,000,000 shares of $.001 par
value nonvoting preferred stock. On July 24, 1994, the Company adjusted its
authorized capital stock to 19,000,000 shares of $.0075 par value common
stock (the "Common Stock"), 1,000,000 shares of $.0075 par value nonvoting
common stock (the "Nonvoting Common Stock"), and 2,000,000 shares of $.001
par value preferred stock (the "Preferred Stock"). The accompanying
financial statements and related notes give retroactive effect to the
merger, the adjustment to capital stock, and the reverse stock split.
On November 4, 1994, the Company formed a wholly-owned subsidiary, NaPro
BioTherapeutics (Canada), Inc. ("NaPro Canada").
BASIS OF PRESENTATION
The accompanying financial statements include the consolidated financial
position, consolidated results of operations and consolidated cash flows of
the Company and its Canadian subsidiary, NaPro Canada, of which the Company
holds 87.3% of the voting rights. All transactions have been accounted for
at historical cost. All balances and transactions between these entities
have been eliminated in the accompanying financial statements. Until
December 31, 1994, the Company was in the development stage.
The accompanying unaudited consolidated financial statements for the three
months periods ended March 31, 1995 and 1996 have been prepared in
accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the period ended March 31, 1996 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1996.
DESCRIPTION OF BUSINESS
The Company is a natural product pharmaceutical company which is focusing
primarily on the development, manufacture and commercialization of
paclitaxel (referred to in some scientific and medical literature as
"taxol"(1)), a naturally occurring anti-cancer compound found in certain
species of yew (Taxus) trees. The Company's formulation of paclitaxel is
referred to herein as "NBT Paclitaxel."
The Company is dependent upon new financing to fund new research and
development as well as its other discretionary working capital
requirements. The Company anticipates, based on its existing available
financial resources, on the proceeds obtainable upon exercise of existing
warrants and on its currently proposed plans and assumptions relating to
its operations (including assumptions regarding the progress of its
research and development, the timing and costs associated with obtaining
regulatory approvals for, and the manufacturing and marketing of, NBT
Paclitaxel), that it has sufficient resources to finance its planned
operations during 1996. In the future the Company may require substantial
additional financing to construct and establish a full-scale commercial
manufacturing facility for NBT Paclitaxel and to develop, commercialize and
manufacture semi-synthetic NBT Paclitaxel and other products. Management
believes that it will be able to obtain appropriate financing; however,
there can be no assurance that future additional financing will be
available to the Company when desired, on commercially reasonable terms, or
at all. The inability to obtain additional financing may have a material
adverse effect on the Company's development plans.
CASH EQUIVALENTS, SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO
MATURITY
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. The Company's cash
equivalents are comprised of money market funds. Securities available for
sale are
--------
(1) TAXOL(R) is a registered trademark of Bristol-Myers Squibb Company
("Bristol-Myers Squibb") for an anti-cancer pharmaceutical preparation
containing paclitaxel.
F-8
<PAGE>
NAPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
investment-grade corporate or government securities and are carried at
amortized cost which approximates fair value. Securities held to maturity
are certificates of deposit maturing in July 1997 and are carried at
amortized cost.
REVENUE RECOGNITION
Revenues from product sales are recognized at the time of shipment. The
Company's production process is not distinct from its research and
development processes. Accordingly, the cost of products sold is included
with the Company's research and other development expenses. Licensing fees
and other revenues are recognized in accordance with the terms of the
applicable agreements. Payments received in advance under these agreements
are recorded as deferred revenue until earned.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions are used in estimating fair value
disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates fair value.
Notes payable and capital lease obligations: The carrying amounts of
borrowings under notes payable and capital lease obligations
approximate fair value.
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out method) or
market.
RESEARCH AND DEVELOPMENT
The Company expenses research and development costs as they are incurred.
These costs include salaries, laboratory supplies, travel, chemicals,
facilities, equipment and other expenditures.
DEPRECIATION
Depreciation of property and equipment is computed on the straight-line
method over estimated useful lives generally between three and seven years.
Leasehold improvements and equipment recorded under capital leases are
amortized over the shorter of their estimated useful lives or the lease
term. Depreciation and amortization expenses are allocated to either
general and administrative or research and development expense, depending
on the use of the related property and equipment.
NET LOSS PER SHARE
Except as noted below, net loss per share is computed using the weighted
average number of shares of Common Stock outstanding. Common equivalent
shares from stock options and warrants are excluded from the computation as
their effect is antidilutive, except that, pursuant to Securities and
Exchange Commission Staff Accounting Bulletin Number 83, Earnings per Share
Computations in an Initial Public Offering, 315,854 common and common
equivalent shares issued during the 12-month period prior to the Company's
August 1994 initial public offering (the "IPO") at prices below the
anticipated public offering price were included in the calculation as if
they were outstanding for all periods presented, up to the close of the
initial public offering.
LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS No.
121"), which requires impairment losses to be recorded on long-lived assets
used in operations when indications of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. SFAS No. 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company will adopt SFAS No. 121 in the first quarter of 1996 and, based on
current circumstances, does not believe adoption will have a significant
impact on the financial statements.
F-9
<PAGE>
NAPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 123, Accounting and Disclosure of
Stock-Based Compensation ("SFAS No. 123"). SFAS No. 123 is applicable to
fiscal years beginning after December 15, 1995 and gives the option to
either follow fair value accounting or to follow Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB No.
25"), and related interpretations. The Company has determined that it will
elect to continue to follow APB No. 25 and related interpretations in
accounting for its employee stock options.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1993 and 1994 financial
statements to conform with the 1995 financial statement presentation.
FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES; SIGNIFICANT CUSTOMERS
Domestic and foreign financial information is as follows:
<TABLE>
<CAPTION>
UNITED NORTH TOTAL
YEAR STATES AMERICA ELIMINATIONS COMPANY
---- ---------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Net sales to affiliated 1993 $1,247,819 $ -- $ -- $1,247,819
and unaffiliated
customers...............
1994 1,002,037 148,347 (148,347) 1,002,037
1995 2,623,426 569,337 (569,337) 2,623,426
Operating loss........... 1993 4,953,858 -- -- 4,953,858
1994 5,913,420 68,321 -- 5,981,741
1995 3,851,234 432,600 -- 4,283,834
Identifiable assets 1994 5,019,168 672,226 (715,442) 4,975,952
December 31,............
1995 9,225,725 6,820,044 (4,092,419) 11,953,350
</TABLE>
For the years ended December 31, 1993, 1994 and 1995, approximately 80%,
15% and 75%, respectively, of the Company's sales were export sales to F.H.
Faulding & Co., Limited ("Faulding"). Further, substantially all of the
Company's accounts receivable at December 31, 1994 and 1995 were from
Faulding (see Note 8). The Company is dependent on sales to its two
development and marketing partners, Faulding and the Baker Norton
subsidiary of IVAX Corporation ("IVAX") (see Note 8) and does not require
collateral to secure accounts receivable from these partners. Sales to
these partners as a percent of total sales were as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Faulding..................................................... 80% 15% 75%
IVAX......................................................... 1% 71% 22%
</TABLE>
RISKS AND UNCERTAINTIES RELATED TO DISTRIBUTION
The Company's currently largest customer, Faulding, distributes NBT
Paclitaxel in Australia. Faulding's main competitor in the Australian
market, Bristol-Myers Squibb Company ("BMS"), has brought legal action
against Faulding on the basis of infringement of certain BMS patents, which
Faulding is claiming are invalid in a separate suit. Litigation is an
uncertain process, and no assurances can be given that BMS will not obtain
an injunction against Faulding which could prevent Faulding from marketing
NBT Paclitaxel in Australia pursuant to Faulding's generic approval. If
Faulding were to be
F-10
<PAGE>
NAPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
prevented from continuing to market paclitaxel in Australia pursuant to its
current generic approval, then Faulding would be unable to continue to
market NBT Paclitaxel until such time as Faulding obtains its own
nongeneric approval which does not rely on the administration methods
claimed in the BMS patents. If BMS is successful in enforcing its patent
claims against Faulding, such a result would have a material adverse effect
on the Company.
2.RELATED PARTY TRANSACTIONS
In conjunction with employment, the Company agreed to loan an officer of
the Company up to $20,000. In January 1994, $18,487 was advanced under this
agreement and remains outstanding at December 31, 1995.
From time to time, certain employees and officers of the Company may enter
into agreements with the Company to defer all or portions of their salaries
as a method to conserve cash in the Company. Such amounts totaled $169,358
at December 31, 1994 and 1995. The Company has no obligation to repay such
amounts until the Company is profitable.
The Company recorded $707,190 and $589,660 in 1994 and 1995, respectively,
in sales to IVAX, a marketing and development partner which owned 14.3% and
13.2% of the Company's outstanding shares of common stock (see Notes 1 and
8) at December 31, 1994 and 1995, respectively.
In August 1995, the Company repurchased 144,288 shares of its common stock
from certain executive officers of the Company in exchange for the
cancellation of certain indebtedness owed by such officers of $1,684,547 to
the Company. Included in the canceled indebtedness was $192,867 of accrued
interest (see Note 6).
3.NOTES PAYABLE
In 1992, 1993 and 1994, Faulding made advance payments to the Company
totaling $1,100,000. In March 1995, the Company and Faulding finalized an
agreement to convert the advance payments into a note payable with a face
value of $1,200,000, due in June 1997. The $100,000 original issue discount
is being amortized over the life of the note and has a remaining balance of
$50,000 at December 31, 1995. The portion of the note on which interest
accrues at the rate of 9% increases over time as deliveries of product are
made to Faulding. At December 31, 1995, interest is being accrued on
$700,000 of the principal balance. Interest accrual is scheduled to
commence in the first quarters of 1996 and 1997, with respect to the
remaining $300,000 and $200,000 of principal, respectively.
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------ -----------
1994 1995 1996
------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to Faulding, net of unamortized
original issue discount, due in June 1997,
interest at 9% accruing on $700,000, payable
quarterly................................... $ -- $1,150,000 $1,158,333
Note payable to stockholder, due in December
1995........................................ 40,000 -- --
Note payable, due in March 1996, interest at
6.81%, accruing monthly..................... -- 38,801 46,488
Note payable, due in March 1995.............. 43,443 -- --
------- ---------- ----------
83,443 1,188,801 1,204,821
Less amounts currently payable............... 83,443 38,801 46,488
------- ---------- ----------
Notes payable-long term...................... $ -- $1,150,000 $1,158,333
======= ========== ==========
</TABLE>
Interest paid approximated interest expense for the years ended December
31, 1993 and 1994. For the year ended December 31, 1995, interest paid was
$69,780 and interest expense was $149,869.
Future minimum payments under notes payable are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996............................................................. $ 38,801
1997............................................................. 1,200,000
----------
Total............................................................ 1,238,801
Less unamortized original issue discount......................... 50,000
----------
$1,188,801
==========
</TABLE>
F-11
<PAGE>
NAPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
4.CAPITAL LEASE OBLIGATIONS
The Company's property held under capital leases consisted of the
following, which is included in property and equipment:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1995
------- --------
<S> <C> <C>
Office equipment........................................... $11,496 $ 72,695
Laboratory equipment....................................... 83,661 356,468
------- --------
95,157 429,163
Less accumulated depreciation.............................. 21,230 96,133
------- --------
$73,927 $333,030
======= ========
</TABLE>
At December 31, 1995, minimum payments under capital lease obligations are:
<TABLE>
<CAPTION>
<S> <C>
1996............................................................... $170,240
1997............................................................... 162,534
1998............................................................... 155,057
--------
Net minimum lease payments......................................... 487,831
Less amount representing interest.................................. 83,566
--------
Present value of minimum lease payments............................ 404,265
Less current portion............................................... 105,454
--------
$298,811
========
</TABLE>
The Company has entered into an irrevocable standby letter of credit
agreement with a financial institution to support a capital lease agreement
for up to $500,000 at an interest rate of prime plus 2%. As of December 31,
1995, no funds have been drawn on the letter of credit.
The Company is required to maintain certificates of deposit for 33% of the
remaining principal outstanding under capital lease obligations ($123,750
at December 31, 1995) as collateral as long as a letter of credit is
outstanding. Such pledged amounts are classified as restricted cash in the
accompanying consolidated balance sheets.
5.INCOME TAXES
The Company accounts for income taxes in conformity with Financial
Accounting Standards Board Statement No. 109, Accounting for Income Taxes
("SFAS No. 109"). Under the provisions of SFAS No. 109, a deferred tax
liability or asset (net of a valuation allowance) is provided in the
financial statements by applying the provisions of applicable tax laws to
measure the deferred tax consequences of temporary differences that will
result in net taxable or deductible amounts in future years as a result of
events recognized in the financial statements in the current or preceding
years.
As of December 31, 1995, the Company has net operating loss carryforwards
for income tax purposes of approximately $15,180,000 and research and
development credits of $159,000 to offset future taxable income in the
United States, expiring as follows:
<TABLE>
<CAPTION>
RESEARCH
NET AND
OPERATING DEVELOPMENT
LOSSES CREDITS
----------- -----------
<S> <C> <C>
2006................................................. $ 282,000 $ --
2007................................................. 1,826,000 52,000
2008................................................. 3,328,000 54,000
2009................................................. 4,600,000 38,000
2010................................................. 5,144,000 15,000
----------- --------
$15,180,000 $159,000
=========== ========
</TABLE>
F-12
<PAGE>
NAPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
In Canada, the Company has net operating loss carryforwards of
approximately US$225,000, expiring in 2002.
Under Section 382 of the Internal Revenue Code of 1986, as amended, the
utilization of net operating loss carryforwards is limited after an
ownership change, as defined in such Section 382, to an annual amount equal
to the value of the loss corporation's outstanding stock immediately before
the date of the ownership change multiplied by the federal long-term tax-
exempt rate in effect during the month the ownership change occurred. At
least one such ownership change has occurred. As a result, the Company will
be subject to an annual limitation on the use of its net operating losses.
This limitation affects net operating losses incurred up to the ownership
change and does not reduce the total amount of net operating loss which may
be taken, but rather limits the amount which may be used during a
particular year. Therefore, in the event the Company achieves
profitability, such limitation would have the effect of increasing the
Company's tax liability and reducing the net income and available cash
resources of the Company if the taxable income during any year exceeded the
allowable loss carried forward to that year.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets
with respect to United States taxing authorities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation....................... $ 13,587 $ --
Other............................................ 43,466 41,724
----------- -----------
Total deferred tax liabilities.................... 57,053 41,724
Deferred tax assets:
Tax net operating loss carry forward............. 3,873,693 5,734,815
Deferred compensation............................ 63,510 63,510
Amortization..................................... 376,256 261,884
Deferred revenue................................. 426,000 19,287
Research and development credits................. 144,325 158,897
Excess of book over tax depreciation............. -- 72,174
Other............................................ 134,348 113,922
----------- -----------
Total deferred tax assets......................... 5,018,132 6,424,489
Valuation allowance............................... (4,961,079) (6,382,765)
----------- -----------
Net deferred tax assets........................... 57,053 41,724
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
Significant components of the Company's deferred tax assets with respect to
Canadian taxing authorities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1994 1995
----- -------
<S> <C> <C>
Deferred tax assets:
Excess of book over tax depreciation........................ $ -- $26,062
Valuation allowance......................................... -- (26,062)
----- -------
$ -- $ --
===== =======
</TABLE>
6.STOCKHOLDERS' EQUITY
COMMON STOCK PRIVATE PLACEMENTS
On April 29, 1993 and March 8, 1994 (see Note 8), the Company entered into
exclusive long-term contracts with a large reforestation company to develop
a renewable source of biomass. In connection with the March 8, 1994
contract, the Company sold 18,000 shares of the Company's Common Stock and
a warrant to acquire an additional 2,667 shares of Common Stock for
$104,685 in cash. The warrant may be exercised immediately at a price of
$9.375 per share and expires June 30, 1996.
F-13
<PAGE>
NAPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
THE SUBSCRIPTION AGREEMENT AND EXECUTIVE AGREEMENTS
In June 1993, the Company entered into a Subscription Agreement (the
"Subscription Agreement") with IVAX pursuant to which the Company sold
1,106,398 shares of the Company's Common Stock and a warrant to acquire an
additional 111,111 shares of Common Stock for $3,000,000 in cash. The
warrant was exercisable immediately at a nominal price, and expires in June
2003 (see Note 8).
In connection with the Subscription Agreement, the Company entered into
Employment and Executive Stock Agreements (the "Executive Agreements"),
pursuant to which the Company sold 1,526,814 shares of the Company's Common
Stock at $1.50 per share to certain officers in exchange for cash and
promissory notes in the aggregate amount of $2,289,076. The notes are
secured by the Common Stock and accrue interest at the lesser of: (i) the
greater of the prime rate minus 1% and the applicable federal rate or (ii)
the highest rate per annum permitted by law. The initial term of the
Executive Agreements is five years. If an officer's employment is
terminated during the initial term of the Executive Agreement, the shares
held by that officer are subject to repurchase by the Company at its
election. The repurchase price is defined by the Executive Agreements, but
in no case will be less than the original cost of the shares. The notes
receivable and related accrued interest are recorded as a separate
reduction of stockholders' equity. In August 1995, the Company repurchased
144,288 shares of Common Stock from certain of these officers in
cancellation of $1,684,547 of this indebtedness (see Note 2).
The Subscription Agreement and Executive Agreements are subject to a
Stockholders Agreement which includes provisions regarding certain matters
including the composition of the Board of Directors, restrictions on the
sale, transfer or other disposition of shares sold in connection with these
agreements, and the Company's first offer right for voluntary election to
purchase all of the shares held by these stockholders.
BRIDGE FINANCING AND EXTRAORDINARY LOSS RESULTING FROM EXTINGUISHMENT
In April 1994, the Company completed the sale (the "Bridge Financing") to
private investors of 26.5 units (the "Units"), each Unit consisting of: (i)
10,000 shares of Common Stock and (ii) an unsecured 9% nonnegotiable
convertible promissory note of the Company in the principal amount of
$50,000, due on the earlier of the consummation of the Company's initial
public offering or March 31, 1995, unless converted, at the option of the
holder, into shares of Common Stock upon the consummation of the Company's
initial public offering, at a rate equal to $5.00 per share of Common Stock
(the "Bridge Note"). The purchase price per Unit was $50,000. The Company
received gross proceeds of $1,325,000 with respect to the sale of such
Units. After the payment of $132,500 in placement fees to the placement
agent for the Company with respect to the sale of such Units, and other
offering expenses of approximately $75,000, the Company received net
proceeds of approximately $1,117,500 from the sale of the Units. The Bridge
Financing resulted in the Company's issuance of a total of $1,325,000
principal amount of Bridge Notes and 265,000 shares of Common Stock. Upon
closing of the Company's IPO, $1,185,000 in principal amount of Bridge
Notes was paid in cash and $140,000 was converted to 28,615 shares of
Common Stock. The repayment of the Bridge Notes prior to their one-year
stated maturity resulted in a $512,482 extraordinary loss.
INITIAL PUBLIC OFFERING OF COMMON STOCK AND REDEEMABLE WARRANTS
In August 1994, the Company completed the IPO of its Common Stock and
redeemable warrants to purchase Common Stock. The offering consisted of
1,800,000 shares of Common Stock and redeemable warrants to purchase
2,070,000 shares of Common Stock (including 270,000 redeemable warrants to
purchase Common Stock issued in connection with the underwriter's
overallotment) (the "Warrants"). The Common Stock and Warrants were
purchased separately and are separately transferable. Each Warrant entitles
the registered holder thereof to purchase one share of Common Stock at a
price of $5.00, subject to adjustment in certain circumstances, for a
period of three years, commencing February 1, 1995. The Warrants are
redeemable by the Company, upon the consent of the IPO underwriter, at any
time commencing February 1, 1995 upon notice of not less than 30 days, at a
price of $.10 per Warrant, provided that the closing bid quotation of the
Common Stock on all 20 trading days ending on the third day prior to the
day on which the Company gives notice has been at least 150% of the then
effective exercise price of the Warrants ($7.50 at December 31, 1994,
subject to adjustment). The net proceeds of the offering to the Company
were $7,352,582 (after deduction of the underwriting discount and expenses
of the offering). In connection with the completion of the IPO, the Bridge
Notes and certain notes payable to IVAX Corporation and another shareholder
as well as certain officer salaries which had been deferred since September
1993 in order to preserve cash, were paid. In addition, the normal vesting
of stock sold in conjunction with the Executive Agreements was accelerated
as a result of completion of the IPO, resulting in a charge, during 1994,
of $307,749 to general and administrative expense.
F-14
<PAGE>
NAPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
FAULDING PRIVATE PLACEMENT AND ELIMINATION OF THE FAULDING ROYALTY
Contemporaneously with consummation of the IPO, the Company sold to
Faulding in a private transaction (the "Faulding Private Placement")
400,000 shares of the Company's Nonvoting Common Stock at a price of $5.00
per share, the initial public offering price per share in the IPO, and
400,000 warrants (the "Faulding Warrants") to purchase an additional
400,000 shares of Nonvoting Common Stock at a price of $.10 per warrant,
the initial public offering price per Warrant. Shares of Nonvoting Common
Stock will automatically convert to Common Stock (with full voting rights),
on a share-for-share basis, upon Faulding's disposition thereof. The
Nonvoting Common Stock and the Faulding Warrants are identical in all
respects to the Common Stock and Warrants which were sold in the IPO,
except that, other than in limited circumstances, Faulding, as the holder,
has no voting rights with respect to the Nonvoting Common Stock, and the
Faulding Warrants are exercisable for Nonvoting Common Stock instead of
Common Stock until Faulding's disposition thereof. The proceeds from
issuance of the Nonvoting Common Stock and Faulding Warrants were as
follows: $1,000,000 was applied directly to eliminate the Company's
liability to Faulding resulting from Faulding's royalty rights under the
Faulding Agreement (the "Faulding Royalty") and cash of $1,040,000 was
received by the Company. Under the Faulding Royalty, the Company would have
been obligated to pay Faulding 4% of the Company's sales price on the first
100,000 grams of NBT Paclitaxel it sold to third parties for commercial
use. The cost of eliminating the Faulding Royalty was expensed, and was
separately reflected in the statement of operations for the year ended
December 31, 1994.
PREFERRED STOCK PRIVATE PLACEMENT
In July 1995, the Company closed a private placement of 638,750 shares of
Convertible Preferred Stock, Series A (the "U.S. Preferred") of the
Company, for proceeds of $5,114,111.
In July and August 1995, the Company closed a private placement of 725,513
shares of Convertible Preferred Stock, Series A (the "Canadian Preferred")
of NaPro Canada, for proceeds of $5,959,060.
The U.S. Preferred has a liquidation preference of $8.00 per share and is
immediately convertible into Common Stock of the Company on a share-for-
share basis at the option of the holder. The U.S. Preferred may be redeemed
by the Company at its liquidation value beginning one year after issuance
if the average trading price for the Company's Common Stock over a 20
trading day period has equaled or exceeded $16.00 and beginning three years
after issuance if such trading price has equaled or exceeded $10.00.
Holders may elect to convert their U.S. Preferred into Common Stock of the
Company at any time prior to 15 business days before the date fixed for
redemption. The U.S. Preferred also may be redeemed at any time after
September 30, 2000 at the option of the holder. The Company may elect to
pay the redemption price by issuing its Common Stock valued at 95% of its
then market price. The U.S. Preferred has one vote per share.
The Canadian Preferred has a liquidation preference of CDN$11.00 per share
and may be exchanged for Common Stock of the Company on a share-for-share
basis at any time after December 1, 1995. The Company has the option to
acquire the Canadian Preferred at its liquidation value beginning one year
after issuance if the average trading price for the Company's Common Stock
over a 20 trading day period has equaled or exceeded the equivalent of
CDN$22.00 and beginning three years after issuance if such trading price
has equaled or exceeded the equivalent of CDN$13.75. Holders may elect to
exchange their Canadian Preferred for Common Stock of the Company at any
time prior to 15 business days prior to the date fixed for the Company to
acquire the shares under the foregoing option. Holders have the
option to require the Company to purchase the Canadian Preferred for its
liquidation preference at any time after September 30, 2000. The Company
may elect to pay the purchase price of the Canadian Preferred by issuing
its Common Stock valued at 95% of its then market price. The Canadian
Preferred is entitled to one vote per share in NaPro Canada.
At December 31, 1995, a total of 513,750 shares of the U.S. Preferred had
been converted into 513,750 shares of Common Stock of the Company and
266,421 shares of the Canadian Preferred had been exchanged for 266,421
shares of Common Stock of the Company.
The Company registered under the Securities Act of 1933 the resale of
shares of its Common Stock issued upon conversion of the U.S. Preferred or
exchange of the Canadian Preferred. Neither the U.S. Preferred nor the
Canadian Preferred has any dividend requirement.
PRO FORMA STOCKHOLDERS' EQUITY (UNAUDITED)
In May 1996, the Company's Board of Directors authorized the Company to
proceed with the redemption of 2,070,000 redeemable Warrants and with an
underwritten offering of 2,000,000 shares of Common Stock. Pro forma
Stockholders' Equity as of March 31, 1996 (Unaudited) gives effect to (i)
the issuance of 630,620 shares of Common Stock and the receipt of cash in
the amount of $3,073,100 (net of offering costs of $80,000) pursuant to
Cash exercise elections of redeemable Warrants and (ii) the issuance of
1,007,102 shares of Common Stock pursuant to Cash-less exercise elections
of 1,438,720 redeemable Warrants.
F-15
<PAGE>
NAPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
7.COMMON STOCK WARRANTS AND OPTIONS
COMMON STOCK WARRANTS
In December 1992 and June 1993, the Company granted to a consultant
warrants to purchase 20,000 shares of Common Stock at $1.875 per share. The
warrants, which were fully vested at December 31, 1993, expire in December
2002 (13,333 shares) and June 2003 (6,667 shares). Additionally, the
Company granted a warrant to a director to purchase 13,333 shares of Common
Stock, at an exercise price of $1.875 per share. This warrant is
exercisable immediately and expires in June 2003. In June 1993, the Company
issued IVAX a warrant to purchase 111,111 shares of Common Stock (see Notes
6 and 8).
In January 1994 and May 1994, the Company granted to a former consultant
and former employee warrants to purchase 33,333 and 16,667 shares,
respectively, of Common Stock, at exercise prices of $1.125 and $.01 per
share, respectively. The warrant to purchase 33,333 shares is exercisable
immediately and expires in April 1997. The warrant to purchase 16,667
shares was exercised in conjunction with the IPO. As a result of these
transactions the Company recognized $82,334 in expense. The expense was
based on an estimated fair market value of the underlying stock of $2.40
per share, consistent with the value of the Bridge Financing described in
Note 6. In August 1994, in conjunction with the IPO, 1,980 warrants were
purchased by the IPO underwriter.
NONPLAN STOCK OPTIONS
In November 1990, Pacific Biotechnology, Inc. ("PB"), one of the Company's
predecessors, granted options to purchase 613,333 shares (reduced to
199,233.6 shares in September 1991) of its common stock to two officers.
The exercise price is $.1875 per share and the options are fully
exercisable during the period from January 1, 1992 to December 31, 1999. In
December 1991, when the Company acquired all of the outstanding common
stock of PB, all options to purchase PB common stock were exchanged for
options to purchase 159,143.30 shares of the Common Stock under the same
terms as the PB options. In January 1994, the Company granted to the four
outside directors of the Company 27,000 nonplan options to purchase shares
of Common Stock which are immediately exercisable at a price of $2.40 and
which expire in January 2002.
THE 1993 STOCK OPTION PLAN
During 1993, the Board of Directors adopted the NaPro BioTherapeutics, Inc.
1993 Stock Option Plan (the "Plan") to provide stock options to employees
and other individuals as determined by the Board of Directors. The Plan
provides for option grants designated as either nonqualified or incentive
stock options. The Plan provides for the issuance of up to 146,667 shares
of Common Stock. The initial term of the Plan is ten years, and the maximum
option exercise period shall be no more than ten years from the date of
grant. The exercise price for the options will be the fair market value, as
determined by any market on which Common Stock is traded, or in the absence
of any market, the price shall be as determined by the Board of Directors,
or if the Company has offered and sold Common Stock within the preceding
sixty days, the price at which such Common Stock was sold. The term of an
option for 667 or more shares shall be eight years, and the term of an
option for fewer than 667 shares shall be five years. Options for 667
shares or more shall vest 25% after each anniversary date of the grant, and
options for fewer than 667 shares shall vest 50% after each anniversary
date of the grant. The exercise price for incentive stock options shall be
no less than fair market value. The exercise price for nonqualified stock
options may be less than, equal to, or greater than fair market value.
1994 LONG-TERM PERFORMANCE INCENTIVE PLAN
In May 1994, the Board of Directors adopted and in July 1994, the
shareholders approved, the 1994 Long-Term Performance Incentive Plan (the
"Incentive Plan"). An aggregate of 375,000 shares were authorized for
issuance under the Incentive Plan, to be increased to 875,000 shares
authorized, subject to stockholders' approval. The Incentive Plan provides
for granting to employees and other key individuals who perform services
for the Company ("Participants") the following types of incentive awards:
stock options, stock appreciation rights ("SARs"), restricted stock,
performance units, performance grants and other types of awards that the
Compensation Committee deems to be consistent with the purposes of the
Incentive Plan. In addition, each person who is not an employee of the
Company or one of its subsidiaries and who is elected or re-elected as a
director of the Company by the stockholders at any annual meeting of
stockholders commencing with the 1994 annual meeting, and, if first elected
or appointed other than at an annual meeting, upon such election or
appointment, will receive, as of the business day following the date of
each such election or appointment, a nonqualified option to purchase 5,000
shares of Common Stock.
F-16
<PAGE>
NAPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
The following summarizes stock option activity and balances:
<TABLE>
<CAPTION>
STOCK EXERCISE
OPTIONS PRICE
------- ------------
<S> <C> <C>
Outstanding at December 31, 1992....................... 159,467 $ .19
Granted................................................ 79,733 .75
Canceled............................................... (13,333) .75
-------
Outstanding at December 31, 1993....................... 225,867 .19--.75
Granted................................................ 144,934 2.40--6.00
Canceled............................................... (6,667) 2.40
-------
Outstanding at December 31, 1994....................... 364,134 .19--6.00
Granted................................................ 241,792 6.25--11.75
Canceled............................................... (6,667) 2.40
Exercised.............................................. (31,652) .75--2.40
-------
Outstanding at December 31, 1995....................... 567,607 .19--11.75
Granted (unaudited).................................... 36,000 10.13--11.13
Canceled (unaudited)................................... (3,500) 6.00--10.13
Exercised (unaudited).................................. (4,667) .75--2.40
-------
Outstanding at March 31, 1996 (unaudited).............. 595,440 .19--11.75
=======
</TABLE>
Exercisable shares at December 31, 1995 are 234,252. The above stock
options not already exercisable vest over the next nine years.
8.STRATEGIC ALLIANCES
The Company has entered into strategic alliances with two pharmaceutical
companies, Faulding and IVAX, which the Company believes have the
capabilities to obtain commercial approval for NBT Paclitaxel and establish
NBT Paclitaxel as a major product in the market. These strategic partners
will assume responsibility for funding the cost of all aspects of the
required clinical and regulatory processes in their respective markets,
procedures that would be too costly for the Company to undertake.
THE FAULDING AGREEMENT
In 1992, the Company entered into an initial 20-year exclusive agreement
with Faulding, which was amended in June 1993, January 1994 and March 1995
(the "Faulding Agreement"), to develop and market paclitaxel in ten
countries, including Australia, New Zealand, and much of Southeast Asia.
The Faulding Agreement also grants Faulding the nonexclusive right to sell
NBT Paclitaxel supplied by the Company in certain countries in the Middle
East. Pursuant to the Faulding Agreement, Faulding paid the Company a
$200,000 licensing fee and also provided the Company $1,100,000 of
advances. The $1,100,000 in advances were subsequently converted into notes
payable (see Note 3).
The Faulding Agreement provides that the Company shall supply all of
Faulding's requirements for paclitaxel. The Company is paid a fixed sum for
NBT Paclitaxel supplied for noncommercial uses, and a fixed percentage of
Faulding's sales price for NBT Paclitaxel supplied for commercial use. In
addition, pursuant to the original Faulding Agreement, the Company would
have been obligated to pay Faulding a royalty of up to 4% on the first
100,000 grams of NBT Paclitaxel sold to third parties for commercial use.
However, in 1994, the Company exercised its right to eliminate this royalty
under the Faulding Agreement by paying Faulding $1,000,000 (see Notes 3 and
6).
THE IVAX AGREEMENT
In June 1993, the Company entered into an initial 20-year exclusive
agreement with IVAX to develop and market NBT Paclitaxel in the United
States, Europe, Japan and the rest of the world not covered by the Faulding
Agreement, with the exception of the former Soviet Union countries, China,
certain countries in the Middle East, and the Vatican, territories to which
IVAX has nonexclusive rights. Simultaneously with entering into the IVAX
Agreement, IVAX made a $3,000,000
F-17
<PAGE>
NAPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
equity investment in the Company for 19.8% of the Company's then
outstanding Common Stock (see Note 6) and committed to give the Company an
additional $1,400,000 in loans over the next three years for acquiring yew
tree bark. The loan commitment terminated upon completion of the IPO.
The IVAX Agreement provides that the Company shall supply all of IVAX's
requirements for paclitaxel. The Company is paid a fixed sum for NBT
Paclitaxel supplied for noncommercial uses, and a manufacturing payment
plus a percentage of IVAX's sales profit (as defined by the agreement) for
NBT Paclitaxel sold for commercial uses.
THE PBI AGREEMENT
In March 1994, the Company entered into a ten-year initial-term contract
with Pacific Biotechnologies, Inc. ("PBI"), a subsidiary of Pacific
Regeneration Technologies, Inc., one of the largest reforestation companies
in Canada (the "PBI Agreement"). Under the PBI Agreement, PBI is planting
and maintaining a plantation of yew trees and bushes designed to provide
the Company with a long-term renewable supply of Taxus biomass. Pursuant to
such agreement, the Company is obligated to pay PBI an annual fee equal to
PBI's costs in performing its obligations under the agreement plus overhead
and a specified profit.
The Company applied $1,500,000 of the net proceeds of the IPO to prepay in
full, at a discount, all fees, interest thereon, and all other amounts
accrued and which would accrue and be owed by the Company to PBI under the
PBI Agreement through December 31, 1995. Amounts paid in excess of the
amounts due totaled $268,720 on December 31, 1994 and were recorded on the
balance sheet as prepaid expenses. No corresponding amounts are outstanding
at December 31, 1995. In addition, the Company's obligation under the PBI
Agreement to secure a $100,000 letter of credit in favor of PBI was
eliminated. Until such time as plantation cultivation is developed and
proven, expenditures under the PBI Agreement are being expended as research
and development and are separately reported on the statement of operations.
9.COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company has executed noncancelable operating lease agreements for
office, research and production facilities. As of December 31, 1995, future
minimum lease payments under noncancelable operating lease agreements are
as follows:
<TABLE>
<S> <C>
1996.............................................................. $ 495,102
1997.............................................................. 515,375
1998.............................................................. 498,857
1999.............................................................. 510,725
2000.............................................................. 438,543
----------
Total $2,458,602
==========
</TABLE>
Rent expense for the years ended December 31, 1993, 1994 and 1995 amounted
to $215,138, $146,400 and $262,332, respectively.
UNCERTAINTY OVER THE SELLING PRICE UNDER THE FAULDING AGREEMENT
Under the Faulding Agreement (see Note 8), the Company is paid a fixed sum
for NBT Paclitaxel supplied for noncommercial uses, and a fixed percentage
of Faulding's sales price for NBT Paclitaxel supplied for commercial use.
The Company recognizes the corresponding revenue at the time of shipment of
NBT Paclitaxel to Faulding, based upon the intended use indicated by
Faulding on its purchase orders. Faulding's actual selling price, however,
may differ from the amounts originally budgeted and indicated to the
Company. Faulding has agreed to communicate to the Company the final amount
of sales, and, average selling prices, and on or about April 30, 1996, an
adjustment will be calculated, which may either increase or decrease the
Company's revenue from sales of products to Faulding for 1995.
F-18
<PAGE>
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No dealer, sales representative or any other person is authorized in connection
with any offering made hereby to give any information or to make any
representation not contained herein and, if given or made, such information or
representation must not be relied upon as having been authorized by the Company
or the Underwriters. This Prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy, any security other than the securities offered
hereby, nor does it constitute an offer to sell or a solicitation of an offer
to buy any such securities to any person in any jurisdiction in which it is
unlawful to make such an offer or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall under any circumstances create any
implication that there has been no change in the affairs of the Company since
the date hereof or that the information contained herein is correct as of any
date subsequent to the date hereof.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................................... 3
Risk Factors............................................................... 6
Use of Proceeds............................................................ 20
Price Range of Common Stock................................................ 21
Dividend Policy............................................................ 21
Capitalization............................................................. 22
Dilution................................................................... 23
Selected Financial Data.................................................... 24
Management's Discussion and
Analysis of Financial Condition and
Results of Operations..................................................... 25
Business................................................................... 31
Management................................................................. 47
Certain Relationships and Related
Transactions.............................................................. 59
Principal Stockholders..................................................... 61
Description of Capital Stock............................................... 63
Underwriting............................................................... 67
Legal Matters.............................................................. 69
Experts.................................................................... 69
Additional Information..................................................... 69
Index to Financial Statements.............................................. F-1
</TABLE>
----------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,600,000 SHARES
[LOGO]
NaPro BioTherapeutics, Inc.
COMMON STOCK
----------------
PROSPECTUS
----------------
Vector Securities International, Inc.
J.P. Morgan & Co.
August 1, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a statement of estimated expenses in connection with the
issuance and distribution of the securities being registered, other than
underwriting discounts and commissions:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee................ $ 11,903
National Association of Securities Dealers, Inc Filing Fee......... 3,950
NASDAQ National Market Listing Fee................................. 50,000
Blue Sky Legal Fees and Expenses................................... 15,000
Printing Expenses.................................................. 125,000
Transfer Agent's Fees and Expenses................................. 10,000
Accounting Fees and Expenses....................................... 50,000
Legal Fees and Expenses............................................ 150,000
Miscellaneous Expenses............................................. 34,147
--------
Total............................................................ $450,000
========
</TABLE>
- --------
* To be supplied by amendment.
All such expenses will be borne by the NaPro BioTherapeutics, Inc. (the
"Company").
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is incorporated under the laws of the State of Delaware. Section
145 of the General Corporation Law of the State of Delaware (the "DGCL")
provides that a Delaware corporation may indemnify any person who is, or is
threatened to be made, a party to any threatened, pending or completed action,
suit or proceedings, whether civil, criminal, administrative or investigative
(other than an action by or in the right of such corporation), by reason of
the fact that such person was an officer, director, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding, provided such person acted
in good faith and in a manner he reasonably believed to be in or not opposed
to the corporation's best interest and, with respect to any criminal action or
proceedings, had no reasonable cause to believe that his conduct was illegal.
A Delaware corporation may indemnify any person who is, or is threatened to be
made, a party to any threatened, pending or completed action or suit by or in
the right of the corporation by reason of the fact that such person was a
director, officer, employee or agent of such corporation, or is or was serving
at the request of such corporation as director, officer, employee or agent of
another corporation or enterprise. The indemnity may include expenses
(including attorneys' fees) actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit, provided
such person acted in good faith and in a manner he reasonably believed to be
in or not opposed to the corporation's best interests except that no
indemnification is permitted without judicial approval if the officer or
director is adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him against the expenses
which such officer or director has actually and reasonably incurred.
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") provides for the indemnification of directors
and officers of the Company to the fullest extent permitted by Section 145 of
the DGCL. In that regard, ARTICLE SIX, subparagraph (d) of the Certificate of
Incorporation provides that the personal liability of a director or officer of
the Company
II-1
<PAGE>
to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director or officer shall be limited to the fullest extent
permitted by the DGCL, as it now exists or may hereafter be amended and that
any repeal or modification of ARTICLE SIX, subparagraph (d) of the Certificate
of Incorporation by the stockholders of the Company shall not adversely affect
any right or protection of a director or officer of the Company existing at
the time of such repeal or modification.
In addition, of the Bylaws of the Company provide indemnification to the
fullest extent permitted by the DGCL as follows:
ARTICLE VI
INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS
1. INDEMNIFICATION: THIRD PARTY ACTIONS. The corporation shall indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that he or she is or was a
director, officer, employee or agent, of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgment, fines and amounts paid
in settlement actually and reasonably incurred by him or her in connection
with such action, suit or proceeding if he or she acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interest of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was
unlawful. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which he or she reasonably believed to be in
or not opposed to the best interest of the corporation, and, with respect to
any criminal action or proceeding, had reasonable cause to believe that his or
her conduct was unlawful.
2. INDEMNIFICATION: DERIVATIVE ACTIONS. The corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he
or she is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees) actually and
reasonably incurred by him or her in connection with the defense or settlement
of such action or suit if he or she acted in good faith and in a manner he or
she reasonably believed to be in or not opposed to the best interests of the
corporation and, except that no indemnification shall be made in respect of
any claim, issue or matter as to which such person shall have been adjudged to
be liable to the corporation unless and only to the extent that the court in
which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the court shall deem proper.
3. MANDATORY INDEMNIFICATION. To the extent that a director or officer,
employee or agent of the corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in Sections
1 and 2 of this Article VI or in defense of any claim, issue or matter
therein, he or she shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him or her in connection therewith.
4. AUTHORIZATION FOR INDEMNIFICATION. Any indemnification under Sections 1
and 2 of this Article VI (unless ordered by a court) shall be made by the
corporation only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is
II-2
<PAGE>
proper in the circumstances because he or she has met the applicable standard
of conduct set forth in Section 1 and 2 of this Article VI. Such determination
shall be made (1) by the board of directors by a majority vote of a quorum
consisting of directors who were not parties to such action, suit or
proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable
a quorum of disinterested directors so directs, by independent legal counsel
in a written opinion, or (3) by the stockholders.
5. ADVANCE PAYMENT OF EXPENSES. Expenses incurred in defending a civil or
criminal action, suit or proceeding may be paid by the corporation in advance
of the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of the director or officer to repay such amount if
it shall ultimately be determined that he or she is not entitled to be
indemnified by the corporation as authorized in this Article VI. Such expenses
incurred by other employees and agents may be so paid upon such terms and
conditions, if any, as the board of directors deems appropriate.
6. NON-EXCLUSIVITY. The indemnification and advancement of expenses
provided by, or granted pursuant to , the other subsections of this Article VI
shall not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any bylaw,
agreement, vote of stockholders or disinterested directors or otherwise, both
as to action in his or her official capacity and as to action in unless
otherwise provided when authorized or ratified, as to a person who has ceased
to be a director, officer, employee or agent and shall inure to the benefit of
the heirs, executors and administrators of such a person.
7. INSURANCE. The corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him or her and incurred by him or her in any such capacity,
or arising out of his or her status as such, whether or not the corporation
would have the power to indemnify him or her against such liability under the
provisions of this Article VI.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Within the past three years, the Company has issued securities without
registration under the Securities Act of 1933, as amended (the "Securities
Act"), as follows:
On April 29, 1993, the Company issued 18,000 shares of Common Stock to
Pacific Regeneration Technologies Inc. at a price of $5.625 per share.
Pursuant to a Stock Purchase Warrant dated June 3, 1993, the Company
granted to Herbert L. Lucas, a warrant to purchase 2,000 shares of Common
Stock at a price of $2.40 per share. This warrant has been exercised.
Pursuant to the Executive Agreements dated June 7, 1993 between the Company
and each of Leonard P. Shaykin, Dr. Sterling K. Ainsworth, Dr. Patricia A.
Pilia and Dr. Larry Helson, each of the foregoing purchased 531,864, 578,592,
150,428 and 265,932 shares of Common Stock, respectively, at a price of $1.50
per share.
Pursuant to Stock Purchase Warrant dated June 7, 1993, the Company granted
to Kirkland & Ellis, a warrant to purchase 6,667 shares of Common Stock at a
price of $1.875 per share.
Pursuant to a Stock Purchase Warrant dated June 7, 1993, the Company
granted to Arthur D. Harrison, a warrant to purchase 13,334 shares of Common
Stock at a price of $1.875 per share.
In June 1993, D&N Holding Company ("D&N"), a wholly-owned subsidiary of
IVAX Corporation, and the Company entered into a Subscription Agreement
pursuant to which the Company sold to D&N, for the aggregate purchase price of
$3,000,000, 1,106,398 shares of Common Stock and a warrant (the "D&N Warrant")
to purchase 111,111 shares of Common Stock at an exercise price of $0.05 per
share. On March 29, 1996, Mr. Shaykin purchased the D&N Warrant with a two
year, non-interest bearing note issued to D&N with a face value of
$944,443.50.
II-3
<PAGE>
Pursuant to a Settlement Agreement dated as of January 7, 1994 by and
between the Company and Broadmark, the Company issued warrants to Broadmark to
purchase 33,334 shares of Common Stock at an exercise price of $1.125 per
share. In exchange for such warrants, the Company and Broadmark agreed to
release and discharge each other from all claims arising out of matters
occurring before January 7, 1994.
In April 1994, the Company completed the sale to private investors of 26.5
Units (the "Units"), each Unit consisting of (i) 10,000 shares of Common Stock
and (ii) an unsecured 9% non-negotiable convertible promissory note of the
Company in aggregate principal amount of $50,000, convertible into shares of
Common Stock at a rate equal to the initial public offering price per share of
Common Stock. The purchase price per Unit was $50,000. The Company received
gross proceeds of $1,325,000 with respect to the sale of such Units. After the
payment of $132,500 in placement fees to the Underwriter, who acted as
placement agent for the Company with respect to the sale of such Units, and
other offering expenses of approximately $75,000, the Company received net
proceeds of approximately $1,117,500 from the sale of the Units. In August
1994, principal and interests totaling approximately $140,000 were converted
into 28,615 shares of Common Stock.
Pursuant to a Settlement Agreement dated May 6, 1994 by and between the
Company and John H. Kreisher ("Kreisher"), the Company issued warrants to
Kreisher to purchase 16,667 shares of Common Stock at an exercise price of
$.01 per share. In exchange for such warrants, the Company and Kreisher
agreed, among other things, to release and discharge each other form all
claims arising out of matters occurring before May 6, 1994. This warrant has
been exercised.
In August 1994, the Company issued and sold to F.H. Faulding & Co., Ltd.
("Faulding"), 400,000 shares of the Company's Nonvoting Common Stock at a
price of $5.00 per share. In consideration for such purchase, $1,000,000 was
applied directly to eliminate Faulding's royalty rights under the Amended and
Restated Master Agreement dated January 19, 1994 between the Company and
Faulding and $1,000,000 was paid in cash to the Company.
In July 1995, the Company closed a private placement of 638,750 shares of
Convertible Preferred Stock, Series A (the "US Preferred") of the Company, for
proceeds of $5,114,111. In July and August 1995, the Company closed a private
placement of 725,513 shares of Convertible Preferred Stock, Series A (the
"Canadian Preferred") of the Company's Canadian subsidiary, NaPro
BioTherapeutics (Canada), Inc. ("NaPro Canada"), for proceeds of $5,959,060.
At December 31, 1995, a total of 513,750 shares of the U.S. Preferred had
converted into 513,750 shares of Common Stock of the Company and 266,421
shares of the Canadian Preferred had been exchanged for 266,421 shares of
common stock of the Company. Subsequent to the private placement, Company
registered under the Securities Act, the resale of shares of Common Stock
issued upon conversion of the U.S. Preferred or exchange of the Canadian
Preferred. Neither the U.S. Preferred nor the Canadian Preferred has any
dividend requirement.
At the times the above-mentioned securities were issued, the foregoing
persons represented to the Company that they were acquiring the securities for
purposes of investment and not with a view to distribution under the
Securities Act and appropriate legends were placed on the certificates
representing the securities so issued. Exemption from registration of such
securities is claimed under Section 4(2) of the Securities Act since no public
offering was involved and the securities had been taken for investment and not
with a view to distribution.
Within the past three years, pursuant to the 1993 Stock Option Plan, the
Company issued and has outstanding options to purchase 100,347 shares of
Common Stock (the "1993 Options") to certain employees, agents and consultants
of the Company. The Company received no consideration for the Options. As a
result of exercise of stock options granted pursuant to this plan, the Company
has issued 36,319 shares of Common Stock.
II-4
<PAGE>
Within the past three years, pursuant to the 1994 Long Term Performance
Incentive Plan, the Company issued and has outstanding options to purchase
315,828 shares of Common Stock (the "1994 Options") to certain employees,
agents and consultants of the Company. The Company received no consideration
for the 1994 Options.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
1.1 -- Form of Underwriting Agreement**
3.1 -- Amended and Restated Certificate of Incorporation of the Company. Incorporated
herein by reference from the Registration Statement on Form S-1 of the Company,
filed with the Securities and Exchange Commission (the "Commission") on July 27,
1994 (File No. 33-78016).
3.2 -- Certificate of Designation for Convertible Preferred Stock, Series A. Incorporated
herein by reference from the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995 (File No. 0-2430).
3.3 -- Bylaws of the Company. Incorporated herein by reference from the registration
statement on Form S-1 of the Company Filed with the Commission on July 27, 1994
(File No. 33-78016).
4.1 -- Form of Common Stock Certificate. Incorporated herein by reference from the
registration statement on Form S-1 of the Company, filed with the Commission on
July 27, 1994 (File No. 33-78016).
4.2 -- Underwriter's Warrant Agreement. Incorporated herein by reference from the
registration statement on Form S-1 of the Company, filed with the Commission on
July 27, 1994 (File No. 33-78016).
4.3 -- Warrant Agreement. Incorporated herein by reference from the registration
statement on Form S-1 of the Company, filed with the Commission on July 27, 1994
(File No. 33-78016).
4.4 -- Warrant Certificate. Incorporated herein by reference from the registration
statement on Form S-1 of the Company, filed with the Commission on July 27, 1994
(File No. 33-78016).
4.5 -- The Certificate of Incorporation and Bylaws of the Company are included as
Exhibits 3.1 through 3.3
5.1 -- Opinion and consent of Kirkland & Ellis as to the legality of the shares being
registered.**
10.1 -- Company's 1993 Stock Option Plan. Incorporated herein by reference from the
registration statement on Form S-1 of the Company, filed with the Commission on
July 27, 1994 (File No. 33-78016).
10.2 -- Company's 1994 Long-Term Performance Incentive Plan. Incorporated herein by
reference from the registration statement on Form S-1 of the Company, filed with
the Commission on July 27, 1994 (File No. 33-78016).
10.3 -- Common Stock Warrant dated as of June 7, 1993 between the Company and Broadmark
Capital Corporation. Incorporated herein by reference from the registration
statement on Form S-1 of the Company, filed with the Commission on July 27, 1994
(File No. 33-78016).
10.4 -- Subscription Agreement dated as of June 7, 1993 between the Company and D&N
Holding Company. Incorporated herein by reference from the registration statement
on Form S-1 of the Company, filed with the Commission on July 27, 1994 (File No.
33-78016).
10.5 -- Stock Purchase Warrant dated as of June 7, 1993 between the Company and Arthur D.
Harrison. Incorporated herein by reference from the registration statement on Form
S-1 of the Company, filed with the Commission on July 27, 1994 (File No. 33-
78016).
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
10.6 -- Stock Purchase Warrant dated as of June 7, 1993 between the Company and D&N
Holding Company. Incorporated herein by reference from the registration statement
on Form S-1 of the Company, filed with the Commission on July 27, 1994 (File No.
33-78016).
10.7 -- Stock Purchase Warrant dated as of June 7, 1993 between the Company and Kirkland &
Ellis. Incorporated herein by reference from the registration statement on Form S-
1 of the Company, filed with the Commission on July 27, 1994 (File No. 33-78016).
10.8 -- Stock Purchase Warrant dated as of December 15, 1992 between the Company and
Kirkland & Ellis. Incorporated herein by reference from the registration statement
on Form S-1 of the Company, filed with the Commission on July 27, 1994 (File No.
33-78016).
10.9 -- Stock Purchase Warrant dated as of June 3, 1992 between the Company and Herbert L.
Lucas. Incorporated herein by reference from the registration statement on Form S-
1 of the Company, filed with the Commission on July 27, 1994 (File No. 33-78016).
10.10 -- Stock Purchase Warrant dated as of June 3, 1992 between the Company and H.J.
Meyers & Co., Inc. Incorporated herein by reference from the registration
statement on Form S-1 of the Company, filed with the Commission on July 27, 1994
(File No. 33-78016).
10.11 -- Stock Purchase Warrant dated as of June 3, 1992 between the Company and Freshman,
Marantz, Orlanski, Cooper, and Klein 1993 Investments. Incorporated herein by
reference from the registration statement on Form S-1 of the Company, filed with
the Commission on July 27, 1994 (File No. 33-78016).
10.12 -- Stock Purchase Warrant dated as of April 30, 1993 between the Company and Pacific
Regeneration Technologies, Inc. Incorporated herein by reference from the
registration statement on Form S-1 of the Company, filed with the Commission on
July 27, 1994 (File No. 33-78016).
10.13 -- Registration Agreement dated as of June 7, 1993 by and among the Company, D&N
Holding Company, Sterling K. Ainsworth, Patricia A. Pilia, Leonard P. Shaykin, and
Lawrence Helson. Incorporated herein by reference from the registration statement
on Form S-1 of the Company, filed with the Commission on July 27, 1994 (File No.
33-78016).
10.14 -- Amended and Restated Stockholders Agreement dated as of May 31, 1994 by and among
the Company, D&N Holding Company, Sterling K. Ainsworth, Patricia A. Pilia,
Leonard P. Shaykin, and Lawrence Helson. Incorporated herein by reference from the
registration statement on Form S-1 of the Company, filed with the Commission on
July 27, 1994 (File No. 33-78016).
10.15 -- Amended and Restated Employment and Executive Stock Agreement dated as of June 7,
1993 and amended and restated as of May 31, 1994 between the Company and Leonard
P. Shaykin. Incorporated herein by reference from the registration statement on
Form S-1 of the Company, filed with the Commission on July 27, 1994 (File No. 33-
78016).
10.16 -- Amended and Restated Employment and Executive Stock Agreement dated as of June 7,
1993 and amended and restated as of May 31, 1994 between the Company and Sterling
K. Ainsworth. Incorporated herein by reference from the registration statement on
Form S-1 of the Company, filed with the Commission on July 27, 1994 (File No. 33-
78016).
10.17 -- Amended and Restated Employment and Executive Stock Agreement dated as of June 7,
1993 and amended and restated as of May 31, 1994 between the Company and Patricia
A. Pilia. Incorporated herein by reference from the registration statement on Form
S-1 of the Company, filed with the Commission on July 27, 1994 (File No. 33-
78016).
10.18 -- Amended and Restated Employment and Executive Stock Agreement dated as of June 7,
1993 and amended and restated as of May 31, 1994 between the Company and Larry
Helson. Incorporated herein by reference from the registration statement on Form
S-1 of the Company, filed with the Commission on July 27, 1994 (File No. 33-
78016).
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
10.19 -- Company's Stock Option Agreement with Sterling K. Ainsworth. Incorporated herein
by reference from the registration statement on Form S-1 of the Company, filed
with the Commission on July 27, 1994 (File No. 33-78016).
10.20 -- Company's Stock Option Agreement with Patricia A. Pilia. Incorporated herein by
reference from the registration statement on Form S-1 of the Company, filed with
the Commission on July 27, 1994 (File No. 33-78016).
10.21 -- Services and Supply Agreement dated as of December 1, 1993 between the Company and
Pacific Biotechnologies Inc. Incorporated herein by reference from the
registration statement on Form S-1 of the Company, filed with the Commission on
July 27, 1994 (File No. 33-78016).
10.22 -- Subscription Agreement dated as of April 29, 1993 between the Company and Pacific
Regeneration Technologies. Incorporated herein by reference from the registration
statement on Form S-1 of the Company, filed with the Commission on July 27, 1994
(File No. 33-78016).
10.23 -- Amended and Restated Master Agreement dated as of January 19, 1994 between the
Company and F.H. Faulding & Co., Ltd. Incorporated herein by reference from
the registration statement on Form S-1 of the Company, filed with the Commission
on July 27, 1994 (File No. 33-78016).
10.24 -- Amendment No. 1 To Amended and Restated Master Agreement Dated January 19, 1994,
executed as of March 23, 1995. Incorporated herein by reference from the Company's
Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 0-
24320).
10.25 -- Agreement dated as of June 7, 1993 between the Company and Baker Norton
Pharmaceuticals, Inc. Incorporated herein by reference from the registration
statement on Form S-1 of the Company, filed with the Commission on July 27, 1994
(File No. 33-78016).
10.26 -- Lease dated February 28, 1995 between the Company and the Mutual Life Assurance
Company of Canada. Incorporated herein by reference from the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995 (File No. 0-2430).
10.27 -- Subscription Agreement and Investment Letter between the Company and NaPro Canada.
Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1995 (File No. 0-2430).
10.28 -- Put/Call Agreement dated July 12, 1995 between the Company and the Purchasers of
Series A Preferred Shares of NaPro Canada. Incorporated herein by reference from
the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995
(File No. 0-2430).
10.29 -- Side Letter dated July 21, 1995 to Put/Call Agreement. Incorporated herein by
reference from the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995 (File No. 0-2430).
10.30 -- Engagement Letter dated February 16, 1995, between the Company and Capital West
Partners. Incorporated herein by reference from the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1995 (File No. 0-2430).
10.31 -- Subscription Agreement between the Company and the purchasers of Convertible
Preferred Stock, Series A, of the Company. Incorporated herein by reference from
the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995
(File No. 0-2430).
10.32 -- Purchase Agreement between the Company and certain purchasers of Preferred Shares
of NaPro Canada. Incorporated herein by reference from the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995 (File No. 0-2430).
10.33 -- Purchase Agreement between the Company and BPI Capital Management Corporation as
to Preferred Shares of NaPro Canada. Incorporated herein by reference from the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 (File
No. 0-2430).
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
10.34 -- Lease between the Company and Gunbarrel Facility L.L.C. dated October 16, 1995.
Incorporated herein by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
10.35 -- First Amendment to Lease dated November 27, 1995, between the Company and
Gunbarrel Facility L.L.C. Incorporated herein by reference from the Company's
Annual Report on Form 10-K for the year ended December 31, 1995.
10.36 -- Agreement between the Company and Pacific Biotechnologies Inc. dated March 29,
1996. Incorporated herein by reference from the Company's Annual Report on Form
10-K for the year ended December 31, 1995.
10.37 -- Culture Agreement dated as of March 1, 1996 between Zelenka Nursery, Inc.
("Zelenka") and the Company. The Company filed with the Commission on June 27,
1996, a Confidential Treatment Request with respect to this agreement (which has
been granted), and accordingly, certain language has been redacted.**
10.38 -- Agreement for Sale, Harvest and Storage of Nursery Stock dated as of May 1, 1996
between Zelenka and the Company. The Company filed with the Commission on June 27,
1996, a Confidential Treatment Request with respect to this agreement (which has
been granted), and accordingly, certain language has been redacted.**
21.1 -- List of Subsidiaries**
23.1 -- Consent of Ernst & Young LLP, Independent Auditors.
23.2 -- Consent of Kirkland & Ellis (included in Exhibit 5.1).**
24.1 -- Powers of Attorney (included in signature page)**
</TABLE>
- --------
*To be filed by Amendment.
** Previously Filed.
(b)Financial Statement Schedules
None.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act,
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
The undersigned Company hereby undertakes (i) that for purposes of
determining any liability under the Securities Act, the information omitted
from the form of Prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of Prospectus filed by the
Company pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be a part of this Registration Statement as of the time it
was declared effective and (ii) that for purposes of determining any liability
under the Securities Act, each post-effective amendment that contains a form
of Prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 3 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Boulder, State of Colorado, as of August 1, 1996.
NaPro BioTherapeutics, Inc.
/s/ Gordon H. Link, Jr.
By: ___________________________________
Gordon H. Link, Jr.
Vice President and Chief Financial
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* President and Chief Executive Officer; August 1, 1996
- ------------------------ Director (Principal Executive Officer)
STERLING K. AINSWORTH
*
- ------------------------- Chairman of the Board of Directors August 1, 1996
LEONARD P. SHAYKIN
/s/ Gordon/H. Link, Jr. Vice President, Chief Financial Officer,
- ------------------------- (Principal Financial and
GORDON H. LINK, JR. Principal Accounting Officer)
* Director August 1, 1996
- -------------------------
E. GARRET BEWKES, JR.
* Director August 1, 1996
- -------------------------
PHILLIP FROST
* Director August 1, 1996
- -------------------------
RICHARD C. PFENNIGER, JR.
* Director August 1, 1996
- -------------------------
PATRICIA C. PILIA
* Director August 1, 1996
- -------------------------
MARK B. HACKEN
* Director August 1, 1996
- -------------------------
VAUGHN D. BRYSON
* Director August 1, 1996
- -------------------------
ARTHUR H. HAYES, JR.
/s/ Gordon H. Link, Jr. Attorney-in-Fact August 1, 1996
- --------------------------
GORDON H. LINK, JR.
</TABLE>
* Signed by Attorney-in-Fact
II-9
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Selected Financial Data" and to the use of our report dated January 26, 1996
in the Registration Statement (Form S-1 No. 333-3051), as amended, and related
prospectus of NaPro BioTherapeutics, Inc. for the registration of 1,600,000
shares of its common stock.
Ernst & Young LLP
Denver, Colorado
July 31, 1996
